Citation: 2007CCI128
Date: 20070502
Docket: 2006-477(IT)I
BETWEEN:
FRÉDÉRIC RIOUX,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
for the 2001 and 2002 taxation years under the Income Tax Act (the Act).
[2] For the 2001
taxation year, the Respondent increased the taxable income of the business
operated by the Appellant by $25,974.
[3] For the 2002
taxation year, the Minister of National Revenue (the Minister) added the amount
of $22,550 in shareholder benefits to the Appellant.
[4] The Minister also
added $1,822.03 in penalties for the 2001 taxation year and $1,626.16 for the
2002 taxation year.
[5] The issues are the
following:
a) to determine whether the amount of $25,974 was
correctly added to the Appellant's taxable income as additional business income
for the 2001 taxation year;
b) to
determine whether the amount of $22,550, considered a benefit conferred upon
the Appellant in his capacity as a shareholder of company 9111‑4934 Québec
Inc., was correctly included in the Appellant's taxable income for the 2002
taxation year;
c) to
determine whether the assessment of a penalty for gross negligence against the
Appellant for the 2001 and 2002 taxation years was justified.
[6] In
making and confirming the assessments and penalties for the 2001 and 2002
taxation years, the Minister of National Revenue (the Minister) relied on the a
number of assumptions of fact, the following of which were admitted by the
Appellant:
6. On May 9,
2005, the Appellant served on the Minister a notice of objection against the
reassessments dated March 10, 2005, for the 2001 and 2002 taxation years.
7. On January
10, 2006, the Minister, in response to the Appellant's notice of objection for
the 2001 and 2002 taxation years, confirmed the reassessments dated March 10,
2005.
8. . . .
a) The Appellant,
for the 2001 taxation year, reported that he operated two sole proprietorships,
one a restaurant and the other a computer supplies and repair store, in
addition to being the sole shareholder of start-up company "9111‑4934
Québec Inc.";
b) The Appellant
operated his restaurant under the name "Restaurant Jasmin" and his computer supplies
and repair store under the name "Électro-Matique Reg'd.";
c) The Appellant, for the 2002 taxation year, reported that he
operated a business, namely, a computer supplies and repair store, and that he
was the sole shareholder of the company "9111‑4934 Québec
Inc.";
d) The economic
activity of the company "9111‑4934 Québec Inc." consisted in
selling and repairing computer equipment.
[7] However,
the Appellant denied the following facts:
e) As part of an audit of the books and records of the sole
proprietorship "Électro-matique
Reg'd.", the Minister, after adding up the sales invoices and taking into account
the amounts submitted by the Department of Economic and Regional Development as
part of the "Connecting Families to the Internet" program, adjusted
the total sales to an amount of $58,033 for the 2001 taxation year;
f) The Minister included, in calculating the income of the Appellant
for the 2001 taxation year, additional income of $25,974, equivalent to the
difference between the $58,033 in adjusted total sales and the $32,058 in sales
reported with respect to the sole proprietorship "Électro-matique Reg'd.";
g) The audit of the books and records of the company "9111‑4934
Québec Inc." for the fiscal year beginning on December 11, 2001, and
ending on February 28, 2002, led to the discovery of $22,550 in faked invoices,
allegedly paid in cash, that had been claimed as website design expenditures
for the company in question;
h) the invoices referred to in the preceding paragraph were
considered fabricated because the subcontractors either denied having received
the money or denied having worked on the development of the website; the
Minister determined that the Appellant had appropriated the amount of $22,550
for personal purposes.
[8] The Appellant
testified that he had been in business since he was 17 years old. He maintained
that he had little or no knowledge of accounting, so he hired an accountant to
handle his business accounts.
[9] He quickly created
a second and then a third company. He would throw all items and documents
related to sales and expenditures haphazardly into a folder that he would
submit to his accountant.
[10] The accountant
allegedly performed incomplete and inadequate work. To explain the absence of accounting
records, deposit slips and bank statements, the Appellant blamed his
accountant, a certain Gagnon, for never having explained to him what to do or
how. The Appellant also blamed this accountant, who did not testify, for never
having told him or taught him anything, for failing to make recommendations,
and for leaving him completely in the dark.
[11] For the 2001
taxation year, the auditor added $25,974 to the Appellant's income. The
Appellant then had his accounts verified by a different accountant, who
produced an operating statement that listed income of $59,617.07, an amount
higher than that calculated by the auditor. However, the expenditures were also
much higher, with the result that the difference between revenues and
expenditures, initially established at $13,613 by the first accountant, was now
$9,962.03, representing a reduction of $3,651.08.
[12] The Appellant, who
works in the computer industry, did not use any software to organize his
accounts, which are clearly an incoherent mess.
[13] In a tone that left
no room for discussion, the Appellant arrogantly maintained that he had hidden
nothing, that he had reported everything and that everything was in order. He
claimed that the errors, inconsistencies, points of confusion and multiple contradictions
were the fault of either his first accountant or the auditor who had not done
his job properly.
[14] He acknowledged that
the firm that had verified his operating statement may have made errors but
added that that was unimportant. The only thing that mattered was that he had
not hidden anything and that he had reported everything, and anybody tempted to
claim otherwise was wrong.
[15] Credibility is
therefore a key factor in dealing with this appeal.
[16] The Appellant has
portrayed himself as an innocent victim of all those who have been involved in
his accounting.
[17] For the 2001 fiscal
year, the Government of Quebec created a program called "Connecting
Families to the Internet" for families of limited means. Under this
financial assistance program, any family meeting certain criteria could receive
a $500 subsidy to buy a computer costing at least $1200 and to subscribe to a
network to have access to the Internet.
[18] The $500 grant was
payable to the computer vendor. If the family met the criteria, it obtained a
"voucher" that it could present to the vendor when purchasing the
desired computer and having it connected it to the Internet. The vendor
credited the $500 at the time of purchase, took the voucher and claimed $500
from the Government of Quebec.
[19] The Appellant
explained that certain families had already acquired a computer at the time the
program was created. Using falsified documents, the Appellant would claim the
subsidy with the complicity of the beneficiaries of the voucher. The Appellant
said he would reimburse $400 to the holder of the voucher and retain $100 as a
commission for his complicity.
[20] In other cases, he
carried out fictitious sales of old computers that he accepted as a deposit for
the non-subsidized portion. He also dealt in used computers, integrating this
business with his sales of subsidized computers.
[21] To explain and even
justify his fraudulent dealings, the Appellant testified in a condescending
manner that the people to whom he gave $400 in return for their vouchers were
generally poor people on welfare who could not afford to buy themselves a
computer. The Appellant almost seemed to expect the Court to congratulate him
for his sympathy and generosity toward the poor. One thing is certain: everything
was arranged so that he could benefit from the maximum number of vouchers
available.
[22] Not one beneficiary
of this arrangement came to testify in support of the Appellant's claims
regarding his generosity. Did he really retain only $100 in every case? The
Court doubts this strongly.
[23] For the 2002
taxation year, the assessment indicates that the Appellant appropriated
$22,550. For this part of his appeal, the Appellant explained, once again, that
the Government of Quebec had created a program to subsidize small and medium
enterprises.
[24] In this case, the
assistance program involved reimbursing 40% of an investment, to a maximum of
$40,000, in the creation of a website that would enable interested businesses
to engage in more rapid and up-to-date development. The program offered a
refundable tax credit of up to $40,000 for an investment of up to $100,000.
[25] To take advantage of
the new program, the Appellant created a new company and hired a certain number
of people. The employment contract or agreement promised compensation that
varied based on the amount obtained under the subsidization program.
[26] Three of those
people testified. They stated that they had lied and that the documents they
had signed were not genuine. It seemed clear to me that these people felt
uncomfortable testifying. One thing is certain: they did not have the skills
necessary to create a website for the business created and run by the
Appellant.
[27] In other words, the
bigger the subsidy, the more money the employees were to receive.
[28] The Appellant
testified that he had claimed 40% of the $86,712 he had supposedly spent on the
creation of a website. He received a cheque for $18,906, as more than half of
his invoices were rejected.
[29] The Appellant admitted
that he had indeed, in his own words, engaged in a [TRANSLATION] "shifting
of invoices".
[30] In other words, he
used invoices that had absolutely no connection with the application for
subsidization. The tax officials did seem to demonstrate a certain amount of
clairvoyance in rejecting half of his support documents as irrelevant. What
amazes me is that the Appellant nevertheless received $18,906. Moreover, there
is no evidence that the website ever became operational.
[31] Alongside these
facts that undermine the credibility of the Appellant's testimony, there exist
a number of additional facts bearing out the Appellant's lack of reliability.
These facts are as follows:
·
a
very large number of cash transactions;
·
the
Appellant's admission that he had forged several signatures (four or five);
·
the
lack of accounting records;
·
the
lack of deposit slips;
·
the
lack of bank statements;
·
the
falsification of several documents in order to obtain benefits to which he was
not entitled;
·
his
admission that his accounts were a complete mess.
[32] The Appellant's
evidence can be summarized as follows: I lied regularly, constantly and
routinely throughout the operation of various businesses, I invented documents,
I forged signatures, I produced false and deceptive documents, I used phoney
bills and I usually dealt in cash. Despite all this, I swear under oath that my
income tax returns are honest, that I owe absolutely no taxes and that the
penalties are unjustified. My good faith cannot be called into question; you have
to believe me; I have nothing to feel guilty about. If anything is amiss, it is
the fault of the accountant, the auditor, or the young people who testified
that they had lied, but it is certainly not my fault.
[33] The Appellant has
not discharged his burden of proof; I am completely disregarding his testimony,
which has no credibility whatsoever. Let me point out that he signed a
statement in which he substantially modified the initial figures regarding his
income, placing the full blame on his accountant.
[34] The Respondent
pointed out the multiple anomalies, inconsistencies and points of confusion
that seemed to indicate that Frédéric Rioux's real revenues were much higher
than those indicated in the assessment under appeal.
[35] As for the justification
for the penalties, it has been demonstrated on a balance of probabilities that
the Appellant is an unscrupulous person who is capable of lying while looking
you right in the eye.
[36] He did not hesitate
to forge signatures or falsify documents to obtain financial benefits.
[37] Several transactions
were conducted in cash. The unavailability of supporting documentation was
clearly intentional, given that the Appellant dealt primarily in cash.
[38] The late Chief Judge
Couture of this Court clearly described the test for deciding the
justifiability of the penalty set out in subsection 163(2) of the Act in Roland
Morin v. The Minister of National Revenue, 88 DTC 1592:
To escape the penalties provided in
subsection 163(2) of the Act, it is necessary, in my opinion, that the
taxpayer's attitude and general behaviour be such that no doubt can seriously
be entertained as to his good faith and credibility throughout the entire
period covered by the assessment, from 1978 to 1981.
[39] The facts are more than
sufficient to support a finding that the Appellant did not hesitate to lie or
use false and misleading documents for his own ends.
[40] I find that his
testimony lacks credibility entirely, and I am fully convinced that he
deliberately lied and consciously provided false and misleading documents when
filing his income tax returns for the 2001 and 2002 taxation years.
[41] According to the
Appellant, any errors, inconsistencies or irregularities were attributable to
his accountants or even the auditor, but he was never to blame. He bordered on
indecency with his claims that if he did lie, falsify and alter documents and
create phoney invoices in order to participate in various scams, it was all in
the name of helping disadvantaged families or poor students who had no
resources. In other words, the Appellant, a true exploiter of the system and of
disadvantaged individuals, had the audacity and the arrogance to claim that he
himself had been exploited and abused, an aberration of the highest order. To conclude,
I am fully satisfied that the assessments made following the audit understate
the real situation.
[42] The evidence also
demonstrates that the witnesses summoned by the Respondent were called upon by
the Appellant to prepare their testimonies, which strikes me as being at the
outer limits of ethical conduct, again demonstrating that the Appellant is an
unscrupulous man, prepared to do anything to get out of paying his taxes.
[43] I dismiss the appeal
without hesitation and confirm the validity of the assessments. As for the
penalties, they are fully justified. The whole with costs to the Respondent.
Signed at Ottawa, Canada, this 9th day of March 2007.
"Alain Tardif"
on this 31st day of August 2007.
Francie Gow, Translator
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