Signed at Ottawa, Canada, this 16th day of January 2009.
“François Angers”
Translation certified true
on this 18th day
of July 2011.
Daniela Possamai,
Translator
Citation: 2008 TCC 635
Date: 20081216
Docket: 2008-1372(IT)I
BETWEEN:
FRANCIS LAVOIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
These are appeals
concerning the Appellant's 2000, 2001 and 2002 taxation years. With regard to
2000 and 2001, notices of reassessment were sent to the Appellant on January 5,
2006, in which the Minister of National Revenue (the Minister), in computing
the Appellant's farm business income, disallowed the deduction of his share of
interest expenses of $8,292 and $10,093, respectively, for the fiscal years
ending December 31, 2000, and 2001. The notice of assessment for 2002 was sent
to the Appellant on January 5, 2006, and the Minister disallowed the deduction
of $27,424 as expenses incurred for the purpose of earning professional income.
The Appellant duly objected and the Minister confirmed the assessments on March
12, 2008.
[2]
In addition to the
Minister's refusal to allow the expenses described above, the Court must determine
whether the Minister was justified in making reassessments for the 2000 and
2001 taxation years beyond the normal assessment period under subsection 152(4)
of the Income Tax Act (the Act).
[3]
The Appellant admitted
that the interest expenses of $8,292 and $10,093 claimed in his tax returns for
the 2000 and 2001 taxation years are in fact capital reimbursements and that
they should not have been claimed as interest paid. The statements of account
from the Caisse populaire for the years in question were submitted with the
amounts of interest paid clearly indicated. The Appellant attributes this error
to the fact that his wife transcribed the amounts in his income tax software
and that the incorrect data were inadvertently given to the accountant who prepares
his income tax returns. The Appellant admitted that he did not review or even
look at either his statements or his income tax returns for the two years in
question.
[4]
As for the auditor, he
argued that not only were the amounts clearly indicated in the statements of
account, but that the interest amounts claimed by the Appellant were greater
than what would have been reasonable having regard to the amount of the loans
or his indebtedness. The evidence also revealed that the statements of account
were submitted to the accountant.
[5]
Subsection 152(4)
enables the Minister to assess any person who files an income tax return for a taxation year if the taxpayer or person filing the return
has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing the return.
[6]
Therefore, there is no
doubt in this case that there was misrepresentation involving the disallowed
interest claimed by the Appellant in that the amounts were capital
reimbursements and not interest payments. The Respondent submits that the
Appellant made this
misrepresentation through neglect or carelessness on the ground that it was very easy to ascertain the amount
paid in interest simply by looking at the statements of account issued by the
Caisse populaire and by looking at the total amount deducted in relation to the
amount of the loans. The evidence showed that the Appellant is an experienced
businessman.
[7]
The explanation given
by the Appellant was that his wife and accountant made a mistake, but the fact
remains that in this case they were his income tax returns and that it was his
responsibility and his duty to make sure that his tax returns were accurate and
correct. The Appellant in this case did not read the statements of account or
his tax returns and did not verify them. In this case, it cannot be said that
he exercised diligence in preparing his income tax returns. If the Appellant
had taken the time to look over his tax returns, he would have noticed that the
amounts claimed as interest were exorbitant in the circumstances. The Minister has met his burden of proof and was therefore justified in assessing the Appellant
beyond the normal assessment period. The appeals concerning the 2000 and 2001
taxation years are therefore dismissed.
[8]
As for the year 2002,
the Appellant submits that the majority of the expenses claimed are expenses
relating to lawyers' fees for representation in various cases, including one in
particular in which he sued his former partner in 2002. The Appellant, however,
was not able to produce a single invoice included on his list of accounting and
legal expenses except for four invoices from the firm Ogilvy Renault, that is,
the firm whose services he retained in the fall of 2002 to bring the action
against his former partner. It should be noted that the list produced is taken
from a document originating from his computer, printed on November 14, 2008.
The list sets out the expenses paid under the heading [TRANSLATION]
"accounting and legal fees" for 2002.
[9]
At the audit stage, he
supplied the same four invoices from Ogilvy Renault and informed the
auditor that the $27,424 claimed was for the four invoices. The following is a
summary of the four invoices:
|
Invoice No. 250527
|
September 24,
2002
|
$5,664.42
|
|
Invoice No. 253688
|
October 23, 2002
|
$2,795.03
|
|
Invoice No. 257340
|
November 25,
2002
|
$16,336.89
|
|
Invoice No. 264994
|
November 29, 2003
|
$4,262.51
|
[10]
It is important to note
that the client whose name appears on the four invoices is Camille Boutin and
that the invoices refer to the Appellant.
[11]
The list of accounting
and legal expenses refers only to the first three invoices described above and
the amounts paid to Ogilvy Renault total $13,459.45, that is, the total of the
first two invoices and an instalment payment of $5,000 for the third invoice.
The other invoices on the list are for the fees of other lawyers and other law
firms. The nature of the services rendered is not specified except for the
lawsuit against the Appellant's former partner. According to the Appellant, the
lawyers Bernier and Jodoin invoiced fees relating to the lawsuit before the
case was transferred to the law firms whose invoices are described above.
[12]
The action brought by
the Appellant against his former partner involves, according to the Appellant,
an oral agreement he had with his partner regarding a financial interest in
real property and professional fees that were owed to him. However, the
Appellant did not produce the notice of action brought by him. He filed his
former partner's statement of defence as evidence that he had claimed fees. As
for his former partner, he denied in his statement of defence the allegations
of the lawsuit and stated that the Appellant had been paid for his services.
[13]
In February 2004, the
Appellant, through new counsel, brought actions against his former partner and
several other stakeholders with regard to his business relationship with his
former partner. This action led to negotiations that brought about an
out-of-court settlement of all litigation which was made enforceable by
the Quebec Court of Appeal. The settlement concerns three related cases
in addition to the main proceeding, that is, the action brought by the
Appellant against his former partner. The settlement put an end to all past,
present and future claims directly or indirectly related to contractual and
extra-contractual relationships as well as any business relationship existing
or having existed between the Appellant, his former partner and the other
stakeholders. The Appellant received, inter alia, a lump sum of $280,000
following that agreement which was declared enforceable on December 14, 2005.
[14]
According to the
Appellant, in order to pay for the action he brought against his former partner
in 2002 and the other actions that followed, he had to borrow money from
Camille Boutin, whose name appears as a client on the four invoices tendered in
evidence. The Appellant stated that the law firm in question preferred to
invoice Mr. Boutin. Once the invoice was paid by Mr. Boutin, the Appellant acknowledged
his debt to him by signing promissory notes. In support of his statement, the
Appellant filed a copy of a deed of hypothecary loan which he signed in favour of that person on October 3,
2002, to secure a loan of $100,000.
[15]
When the Appellant failed
to reimburse the loan and Mr. Boutin passed away, Mr. Boutin's heiress sued the
Appellant in Quebec Superior Court in the fall of 2006. In the statement of
claim, the heiress alleged that the sum of $100,000 had been paid incrementally
as evidenced by a promissory note dated October 13, 2003, for an amount of
$59,568.88 and a series of cheques totalling $35,352.40. Among the cheques,
there is one payable to Ogilvy Renault and bearing the number 383 which was
issued on January 21, 2004, in the amount of $23,400. The claim refers to only
one of the four invoices, that is invoice number 264994 of January 29, 2003,
and to the statement of account of May 20, 2003, where the total fees of
$56,200.05 were reduced by the amount of the cheque, that is, $23,400. The
Appellant testified that the three 2002 invoices were covered by the promissory
note of October 13, 2003, in the amount of $59,568.88, and were therefore not
covered by the payment made by way of cheque number 383.
[16]
The three 2002 invoices
mentioned above total $24,796.34. The total amount of accounting and legal
expenses submitted by the Appellant in Exhibit A-1 is $27,424.81, that is,
exactly the same amount he claimed under this heading in his tax return for the
2002 taxation year. In that list, he states that he paid Ogilvy Renault the
amount of $13,459.45 and refers to the three aforementioned invoice numbers.
Invoices 250527 and 253688 were paid in full, and as for invoice 257340, it is
a $5,000 payment on account. The invoices are all dated December 31, 2002.
[17]
Accordingly, the
Appellant has the burden of establishing on a balance of probabilities that the
expenses he is seeking to deduct were actually incurred and that, if so, he is
entitled to deduct them from his income on the ground that they were incurred
for the purpose of earning income.
[18]
The evidence shows that
at the objection stage the Appellant produced four invoices from a law firm
addressed to Camille Boutin and where the Appellant's name is indicated for
reference purposes. The Appellant explained to the auditor that they were
supporting documents for the claimed expense of $27,424. At the trial, the
Appellant produced a list of expenses under the heading [TRANSLATION] "accounting and legal fees", the total of which
corresponds exactly to the amount claimed in his income tax return. The list
came from the Appellant's computer and was printed on November 14, 2008.
[19]
I must also point out
that, according to the list and the evidence heard, the Appellant did business
with at least seven lawyers or law firms in 2002 and possibly an eighth who is
merely identified in the list as [TRANSLATION] "lawyer". No supporting document
was filed and no explanation of the nature of these expenses was given except
for the fact that at least one lawyer was retained in his tax case and other
lawyers were retained in the case against his former partner. According to the
Appellant, the lawyers Jodoin and Bernier represented him before the matter was
transferred to Ogilvy Renault. In his cross-examination, the Appellant
acknowledged that the Quebec Superior Court minute book entry concerning his
proceedings against his former partner mentioned a lawyer whose name did not
appear anywhere.
[20]
It is therefore
difficult if not impossible to identify the nature of the professional services
rendered as the evidence is limited to the expenses incurred in the action
against the Appellant's former partner. It is also difficult to establish
whether the action was brought for the purpose of claiming the payment of
professional fees or whether it involved an interest the Appellant may have had
in real property and companies or possibly both. As for the settlement
agreement made enforceable by the Quebec Court of Appeal, it refers in very
general terms to the payment of a lump sum as settlement of all existing
business relationships and contractual and extra-contractual relationships
without providing any other details.
[21]
As for the submissions
that Camille Boutin's legal fees were incurred for the benefit of the
Appellant, the only evidence supporting that assertion would be the payment of
invoice 264994 from Ogilvy Renault on November 29, 2003, by cheque number 383
issued by Camille Boutin, which is referred to in the allegations in the
heiress's motion against the Appellant. That same motion refers to several
other invoices from Ogilvy Renault paid in 2003, that is, the year following
the year in question, and also to invoices from other lawyers. It should also
be noted that the promissory note which constitutes part of the $100,000 debt
was signed on October 13, 2003, and that, according to the Appellant, that
amount was used to pay the four invoices from Ogilvy Renault, three of which
date from 2002. The evidence does not specify why the promissory note was
signed in October 2003 for the payment of invoices issued in fall 2002.
[22]
Such evidence is
insufficient and, in my opinion, unreliable. The Appellant did not establish on
a balance of probabilities that he was entitled to deduct the amount of
expenses claimed. He did not answer the question as to whether expenses were
actually incurred, and if so, in what proportion they were incurred for the
purpose of earning income. For these reasons, the appeal from the assessment for the 2002 taxation year is dismissed.
Signed at Edmundston, New Brunswick, this 16th day of December 2008.
“François Angers”
Translation certified true
on this 18th day
of July 2011.
Daniela Possamai,
Translator
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