Citation: 2008TCC215
Date: 20080507
Docket:
2005-329(IT)G
BETWEEN:
MOHSEN BOUALLEG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an
appeal under the Income Tax Act ("the Act") relating to the
2000, 2001 and 2002 taxation years. The assessments were made using the net worth
method.
[2] The questions
in issue are as follows:
(a) Should
the Appellant's income for the 2000, 2001 and 2002 taxation years be increased
by $11,330.57 ($14,330.57 - $3,000.00), $35,435.73 and $33,247.21,
respectively, in unreported income computed using the net worth method?
(b) Are
the penalties imposed on the Appellant for the 2000, 2001 and 2002 taxation
years under subsection 163(2) of the Act warranted in the circumstances?
[3] In making the assessments, assessing the
penalties, and confirming them all, for the 2000, 2001 and 2002 taxation years, the Minister of
National Revenue ("the Minister") relied on the following assumptions
of fact:
[TRANSLATION]
(a) At all relevant times, the Appellant operated in an
equal partnership with another person a taxi business with three cars;
(b) The
Appellant reported low total income during the 2000 ($13,346.00), 2001 ($15,384.00)
and 2002 ($12,929.00) taxation years;
(c) The
Appellant's spouse also reported low income during the 2000, 2001 and 2002
taxation years, that income being essentially from part-time employment;
(d) The
internal control of the business operated at all relevant times by the
Appellant was inadequate;
(e) The
Appellant had little involvement in the administration of the business;
(f) The
Appellant nonetheless was aware of the revenue generated and expenses incurred
in connection with the three taxi vehicles operated by the business;
(g) In
computing his personal income, the Appellant did not report tips in the amount
of $3,500 per year for the 2000, 2001 and 2002 taxation years;
(h) The
Appellant received a gift of $3,000 from his mother-in-law during the 2000
taxation year that he used to purchase his share of the business;
(i) The
income reported by the Appellant during the 2000, 2001 and 2002 taxation years did
not explain the assets he held at all relevant times;
(j) The
Appellant's income did not explain either his cost of living during the 2000,
2001 and 2002 taxation years;
(k) The
audit of the Appellant used the indirect audit method of calculating the difference
in net worth for the 2000, 2001 and 2002 taxation years, given the lack of adequate
supporting documents; see, as if quoted here in full:
- Appendix A:
"Calculation of difference in net worth – For tax purposes" (re: 2000,
2001 and 2002 taxation years);
(l) The
resulting differences between the previous total income reported by the
Appellant for each of the three taxation years 2000, 2001 and 2002 and the
revised total income for those three taxation years, namely $14,330.57 for 2000,
$35,435.73 for 2001 and $33,247.21 for 2002, from which differences
were deducted, in the audit, additional depreciation amounts of $1,950.00 ($14,330.57
- $1,950.00 = $12,381.00), $1,670.00 ($35,435.73 - $1,670.00
= $33,766.00) and $1,272.00 ($33,247.00 - $1,272.00 = $31,975.00)
respectively, were validated by analyzing deposits into the bank accounts
belonging to the Appellant and his spouse and by a third-party confirmation of the
income earned by the Appellant; see Appendices B to J referred to as if quoted
here in full:
- Appendix B:
"Personal balance sheet at December 31" for the Appellant (re: 1999,
2000, 2001 and 2002 taxation years);
- Appendix C: "Business
balance sheet/business's fiscal year at December 31" (re: 1999, 2000, 2001
and 2002 taxation years);
- Appendix D:
"Caisse populaire and Banks" (re: 1999, 2000, 2001 and 2002 taxation
years);
- Appendix E: "List
of accounts receivable" (re: 1999, 2000, 2001 and 2002 taxation years);
- Appendix F:
"Summary of capital assets" (re: 1999, 2000, 2001 and 2002 taxation
years);
- Appendix G: "Investments"
(re: 1999, 2000, 2001 and 2002 taxation years);
- Appendix H:
"List of accounts payable" (re: 1999, 2000, 2001 and 2002 taxation
years);
- Appendix I: "Loans
and Mortgages" (re: 1999, 2000, 2001 and 2002 taxation years);
- Appendix J:
"Auditor's Report" (re: 1999, 2000, 2001 and 2002 taxation years).
[4] The facts can
be summarized relatively easily. The Appellant and his spouse testified. The
Appellant explained that he had worked as a taxi driver in Quebec City for
several years.
[5] In 1999, he
took several months off and left the country, returning to his country of
origin, Tunisia, to visit family
and friends.
[6] He said that
when he returned to Québec in January 2000 he had absolutely nothing, no
assets, other than a $3,000 gift from his parents.
[7] The Appellant and
his spouse said that they live very modestly in a small apartment. When the
Appellant returned to Quebec City, he went back to driving a taxi.
[8] In March of
that year, one Salim Chouari, who owned about 20 taxi licences, proposed that the
Appellant purchase two taxis and the licences needed to operate them in Quebec
City.
[9] The documents
introduced as Exhibit I‑1 (contract of sale signed before Me Fecteau
on November
10, 2000,
Binder I‑1, Tab 24, pages 2020 and 2020‑1) show rather
that the purchase occurred on November 10, 2000, the sale price being $82,084.69.
The parties agreed at that time that they would be equal partners in operating
the two taxis.
[10] To finance the
purchase, Mr. Chouari introduced the Appellant to a financial institution,
which, on the strength of Mr. Chouari's guarantee, advanced the Appellant
the money he needed for the transaction.
[11] A little later,
on November
28, 2000,
the Appellant's partner proposed that they acquire a third licence and a third
taxi.
[12] All of the expenses
associated with the operation of the three vehicles and the repayment of the
loans were paid by the Appellant's partner using money the Appellant's spouse
gave him.
[13] The Appellant's
involvement and work within the partnership essentially consisted in driving a
taxi. He did his work in the same manner as the other drivers. At the end of
his shift, he gave his spouse a summary showing the kilometre reading at the
beginning and end of his shift.
[14] He kept 40
percent of the receipts as his remuneration; he also kept the amount of his
expenses, primarily the cost of gasoline.
[15] This procedure
was identical for all of the drivers. The report was accompanied by a statement
of the distance driven, so that his spouse could do a quick check to determine
whether the receipts corresponded to a minimum of $1 per kilometre driven.
[16] The Appellant explained
that his involvement in the business was limited to driving a taxi. His spouse
and he prepared a brief report that they gave to his partner, Salim Chouari, along
with the money.
[17] He did not ask any
questions and did not request any report regarding repayment of the loan taken
out to purchase the vehicles and taxi licences. He did not check to see whether
the payments were being made, he did not seek information and he assumed that
everything was being done properly. In other words, the Appellant was increasing
his assets without knowing exactly at what pace.
[18] The Appellant's
spouse, who was responsible for the very limited management that was being done,
checked to make sure that the report was reasonable. When there was a
significant amount of cash, a bank deposit was made, and the money was
transferred to Salim Chouari.
[19] The Appellant's
accounting and management activities did not extend beyond that. The Appellant did
not make any accounting entries, nor did he and his wife have access to any
books, if such there were, relating to Salim Chouari's management of the
partnership's business activities.
[20] In addition to
having a very passive role in the management of the partnership he belonged to,
the Appellant was informed of nothing and, even more strangely, he did not
question anything and requested no reports.
[21] Once the money
was transferred, it was administered by Salim Chouari, who looked after
having the numerous repairs done; the vehicles were generally old and needed
many major repairs.
[22] On that point, the
Appellant specified that he did not see the details of the bills or the amounts
of money disbursed by his partner; Salim Chouari was also the owner of the
repair shop that did all the repairs. As well, the Appellant said that a
majority of the expenses were paid in cash, with no supporting documents.
Everything was done in cash, including payment of the mechanic's wages.
[23] Salim Chouari
looked after everything, and did not report to the Appellant, who said, moreover,
that he did not ask for any reports.
[24] The Appellant made
several important admissions, however. First, regarding the tips, he
acknowledged that he had reported them when he started working as a taxi driver.
[25] Once he became
associated with Salim Chouari, the new partnership's accountant, who was chosen
by Mr. Chouari, also became his accountant for the purpose of preparing his
personal tax return; he said that the accountant told him he did not have to
add his tips to his income.
[26] He thereupon
stopped reporting his tips, which generally amounted to about 10 percent
of total receipts, or $350 to $400 per month, that is, more or less $5,000 per
year.
[27] The Appellant
acknowledged that he had not reported tips for the years in issue, thereby
supporting in part the correctness of the reassessments made by the net worth
method.
[28] Second, Salim Chouari
on three occasions gave him money representing profits from the operation of
the three taxis; there was one $800 cash payment and two other payments of
about $500, for a total of $1,800 more or less, and he acknowledged that he had
not reported those amounts in his tax returns for the years in issue. He was
paid those amounts in cash with no explanation whatsoever; once again, he had
blind trust in his partner, Mr. Chouari.
[29] Lastly, the
Appellant also tacitly admitted that the payments his partner made on the loans
taken out when the vehicles and licences were purchased in his name also
constituted unreported income. An examination of the documentary evidence shows
a number of facts that, again, support, at least in part, the correctness of
the assessments.
[30] At the time of
the sale on November 10, 2000, the purchase price was broken down as follows:
|
|
Initial
contribution by partners
|
|
|
Payment to É. Martel
Payment to É. Canuel
Loan - Caisse populaire
Desjardins Sillery
Total purchase price:
|
$ 9,750.00
$14,000.00
$58,334.69
$82,084.69
|
Initial investment
by Mr. Boualleg:
Initial investment
by Mr. Chouari:
Total:
|
$3,000
$3,000
$6,000
|
|
Total
purchase price:
Loan
- Caisse populaire Desjardins Sillery, assumed:
Partners'
investment:
Unexplained
origin:
|
$82,084.69
-$58,334.69
-$ 6,000.00
$17,750.00
|
|
|
|
|
|
|
|
|
[31] The Appellant having
accepted Salim Chouari's proposal, he and Mr. Chouari also acquired a
third vehicle; the Appellant gave no down payment on the acquisition of the
third vehicle and the licence needed to operate it. In fact, there were two
other transactions, which can be summarized as follows (Exhibit I‑1,
Tab 24, pages 2020‑3, 2020‑3 and 2020‑4):
Transactions of November 28, 2000, and February 27,
2001:
|
Acquisition of November 28, 2000:
Disposition of February 27,
2001:
Profit
|
-$50,000.00
$53,000.00
$ 3,000.00
|
|
Acquisition of February 27, 2001:
Loan
from Caisse populaire Desjardins Sillery (02/02/2001)
Difference
|
-$73,000.00
$64,500.00
-$ 8,500.00
|
[32] The transactions
referred to in the various contracts bring to light assets that have been neither
explained nor justified. First, there is an amount of $17,750, of which $8,875 was
for the Appellant.
[33] Second, the
transactions of November 28, 2000, and February 27, 2001, show that the partners took
out a $64,500 loan for a purchase costing $73,000. They therefore must have had
$8,500, including, obviously, the $3,000 profit from the transaction of November 28, 2000.
[34] The loan payments
to be made by the two partners, namely the Appellant and Salim Chouari, were
made out of operating income; it can be concluded from the figures available
that large payments were made, thereby reducing the principal owing and increasing
the assets in the patrimony of the partners, including the Appellant.
[35] In addition to those
figures, there is the fact that the licences, the value of which obviously
increased over the years, also contributed to the growth of the Appellant's
patrimony.
[36] These are
important items regarding which the evidence allows no conclusions to be drawn
based on precise calculations, because the fair market value of the licences
has to be established in a particular way.
[37] In the
circumstances, I cannot disregard those aspects, which have an effect on the
assessments.
[38] Notwithstanding
these facts and the very modest income reported by the Appellant, the auditor
identified a number of acquisitions that suggest that the Appellant had income
that was obviously higher than that reported.
|
|
2000
|
2001
|
2002
|
|
Additional income used as basis of reassessments
|
$11,330.57
|
$35,435.73
|
$33,247.21
|
|
Unreported amounts admitted
|
Distributed surpluses
|
($600)
|
($600)
|
($600)
|
|
Tips
|
($5,000)
|
($5,000)
|
($5,000)
|
|
Principal payments
|
($961)
|
($11,515)
|
($11,147)
|
|
Total admitted
|
($6,561)
|
($17,115)
|
($16,747)
|
|
Difference between Minister's assessment and estimate
of amount Appellant should normally have paid
|
$4,920
|
$15,961
|
$15,079
|
[39] The Appellant acted
extremely unwisely by placing that much trust in an individual he did not know;
he also said he had not made any enquiries to learn the good or bad qualities
of the individual with whom he had decided to go into partnership.
[40] Certainly the
Appellant did not have a lot to lose, given his financial situation. That is
not sufficient, however, to excuse his indifference with regard to the
management of the partnership he belonged to; his conduct can be characterized
as wilful blindness.
[41] Moreover, Salim
Chouari's way of doing things should have made him wary, indeed suspicious
(cash payments, advice that tips need not be reported). Some minimal vigilance
was called for, because his tax liability was directly affected by how the
partnership was managed.
[42] The Appellant was
somewhat naive, but I doubt that he was as indifferent and as uninvolved in the
business of the partnership as he made out. He could have called
Mr. Chouari as a witness to confirm some of his explanations.
[43] Other than making
one fruitless attempt, he chose to do nothing to have Mr. Chouari testify. The
rules allow coercive measures to be taken when a person refuses to cooperate;
in the circumstances, the Appellant cannot invoke to his benefit his unconvincing
attempt to have Mr. Chouari testify.
[44] In light of the
evidence, the net worth method was definitely the appropriate one to use. Moreover,
the validity of that approach was confirmed by the explanations given by the
Appellant himself.
[45] The Appellant admitted
three different income components that should have been reported and were not. The
tips and the payments received from his partner are two items on which the
admissions are unequivocal; on the matter of the payments on the principal of
the loans for which he was the co-borrower, the Appellant did not deny or
dispute the obvious: the enrichment resulting from the portion of the loan payments
that went to the principal therefore cannot be disputed.
[46] It seems that
the auditor took into account the increase in the value of the licences that
occurred over time.
[47] Certainly that
brought about enrichment, but it will have to be added to income on the
disposition of the property, and not as part of an essentially theoretical
exercise. The Appellant presented an incomplete case; he could have put forward
certain arguments that might have worked to his advantage. He did not do so, arguing
impossibility; he is challenging the correctness of the assessments, but he explicitly
admits that he did not report very large amounts of income.
[48] Do the amounts
he admits not reporting correspond to the income added using the net worth
method? Perhaps not exactly. On the other hand, there is no evidence that would
justify completely disregarding the results obtained by using the net worth
method to make the reassessments that are under appeal.
[49] The effect of
accepting the Appellant's arguments and admissions and disposing of his appeal solely
on the basis of those arguments and omissions would be to reward negligence, naivety
and a sort of carelessness sustained by indifference or even unacceptable tacit
complicity.
[50] Counsel for the
Appellant argued that there was no real partnership between the Appellant and
Salim Chouari. That argument simply cannot be accepted: it neither explains nor
justifies the lack of accounting records. If the Appellant was negligent,
unwise or even naive, he has no one to blame but himself.
[51] There is no
basis for that argument. Indeed, the existence of a partnership cannot be
denied or disputed simply because one of the partners is indifferent as to the
ways and means by which his partner operates.
[52] When someone
decides to operate a business, whatever the legal form thereof, it implies that
the person has the qualifications that are needed to comply with all the rules
of the game, particularly in relation to tax matters. If the person does not
have those skills or qualifications, it is essential that he or she do what is
necessary to get them from outside sources.
[53] Naivety, wilful
indifference and failure to take steps to participate in the management of a
partnership are not relevant factors on which a finding that no partnership
existed can be based.
[54] A partnership
that fails to comply with the ordinary rules of operation, or that runs
roughshod over the rights of one of the partners, can easily be dissolved at
the request of a partner who has been the victim of abusive behaviour.
[55] In this case,
the Appellant, out of ignorance, naivety or indifference, tacitly agreed to the
cavalier methods of his partner. He therefore cannot benefit from his own
negligence and his own carelessness by saying that he should not have to suffer
the consequences of his partner's mismanagement.
[56] The Appellant did
or undertook absolutely nothing to compel Mr. Chouari to give him reports,
or to obtain an accounting, other than once he was reassessed.
[57] On the basis of the
evidence submitted, I assess the Appellant's unreported income as follows.
Arbitrarily, I admit—but unfortunately there is no reliable formula for
determining the appropriate amount—I reduce the income attributed to the
Appellant for each of the 2001 and 2002 taxation years by $7,000; for the 2000
taxation year, I confirm the amounts added to the Appellant's income to be
correct.
Penalty
[58] There is no
doubt that the Appellant was negligent and careless. A large part of his woes
is undoubtedly the result of his great naivety, although this was likely exaggerated
to serve his purposes in the appeal.
[59] I am persuaded
that the Appellant understands a lot more than he would like to let on, even
though he stated, and reiterated, that his spouse handled everything relating
to management of the receipts.
[60] With respect to
the unreported tips, the Appellant said he reported them until the accountant
for the business, who also became his accountant, told him that he did not have
to report them. That explanation is highly suspect. Furthermore, in light of
the dispute, he should have taken his enquires a little farther to obtain
correct answers regarding how tips are to be treated.
[61] Taxi drivers
talk and communicate among themselves, and clearly they must talk about this
very important matter, as tips represent a significant part of their disposable
income.
[62] The Appellant explained
that the usual way of paying a taxi driver is to give him 40 percent of
gross receipts. If tips represent 10 percent of revenue, that amounts to
25 percent of taxi drivers' income.
[63] Tips are thus a significant
component of a taxi driver's income. It is entirely unreasonable to think that
an intelligent person like the Appellant could really have believed that he did
not have to report that part of his income. The explanations or excuses offered
by the Appellant are not valid and in no way excuse the fact that he failed to report
large amounts of income.
[64] The Appellant demonstrated
wilful blindness amounting to gross negligence, to the point that the penalties
for this aspect of the matter were entirely justified. This is also true in
respect of the surpluses in the amounts of $800, $500 and $500 that his partner
paid him in cash. There again, the Appellant should have known that this was
income that he had to report.
[65] The final point
is that the most important component of the amounts added to income using the
net worth method is the payments made on the loans taken out to purchase the
three taxis and licences.
[66] In that regard,
there was obviously an enrichment resulting from the principal payments. The
same is true for other disbursements, including the fees paid to the professionals
who were retained to prepare the contracts and licence transfer papers. Some of
those expenses might have been deductible from the partnership's income. The lack
of any accounting records made it impossible to verify and analyze anything.
[67] It was said that
the efforts made by the Appellant to have his partner testify produced no
results. In that case it would perhaps have been necessary to proceed by subpoena
duces tecum or even by order for a warrant for a witness to be arrested.
[68] With regard to
penalties, the difference between the amounts reported and the income determined
for the purpose of the assessment is a very important, if not decisive, factor in
justifying the penalties as appropriate or in refuting the explanations aimed
at proving that there was no negligence or gross negligence.
[69] In this case,
the differences are very substantial; it is entirely unreasonable to believe
that the Appellant did not realize that he was enriched as a result of the payments
whose effect was to reduce the principal amount of the debt.
[70] The penalties
for the 2000, 2001 and 2002 taxation years are warranted. However, because I
have found that the income added will have to be reduced by $7,000 for each of
the 2001 and 2002 taxation years, the penalties will have to be revised to take
that change into account.
[71] For all these
reasons, the appeal is allowed, with costs to the Respondent, and the matter is
referred back to the Minister for reconsideration and reassessment on the basis
that the unreported income for the years in issue is as follows:
2000 – unreported
income added is confirmed
2001 – unreported
income added is reduced by $7,000
2002 – unreported
income added is reduced by $7,000
[72] The penalties
are warranted, but will have to be changed to reflect the corrected unreported
income amounts. Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 7th day of
May 2008.
"Alain Tardif"
Translation
certified true
on this 24th
day of December 2008.
Erich Klein,
Revisor
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