Citation: 2008 TCC 655
Date: 20081128
Docket: 2006-3866(IT)G
BETWEEN:
JEAN-LUC DESCHÊNES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
This is an appeal from
assessments for the 2001, 2002 and 2003 taxation years. The assessments are
made on the basis of the net worth method. In these assessments, the Minister
revised the Appellant’s net business income by adding the amounts of $54,856,
$40,544 and $49,423 for the 2001, 2002 and 2003 taxation years,
respectively. The assessment made for each of the years also includes a penalty
for gross negligence imposed under subsection 163(2) of the Income Tax
Act (the Act). The facts assumed by the Minister to make the assessments
are set out at paragraphs 11 and 12 of the Reply to the Notice of Appeal
which read as follows:
[TRANSLATION]
11. (a) The Appellant
operated a business involving the surfacing of driveways with recycled asphalt;
(b) The business was the Appellant’s sole source of
income except for the investment income amounts of $618.13 (in 2001) and
$556.33 (in 2002);
(c) The Appellant did not keep an account book for
his business; he had no sales invoices and no purchase invoices;
(d) Almost all of the Appellant’s transactions were made
in cash;
(e) The Appellant had accounts with the Caisse
populaire de Rimouski (account no. 105718) and the Caisse populaire de Les
Hauteurs (account nos. 660 and 661);
(f) The Appellant deposited in those accounts an
amount greater than the sales amount reported;
(g) The Appellant began construction of his house at
855 Ste‑Odile Road, Sainte-Odile-sur-Rimouski, in 2001;
(h) The Appellant incurred construction costs in
relation to that residence in the amounts of $57,409.36, $43,202.78 and
$10,377.95 in 2001, 2002 and 2003, respectively;
(i) The Appellant also had another house located at
267 Principale Street, Les Hauteurs;
(j) The Appellant reported net income from his business
in the amounts of $14,543.48, $15,290.98 and $16,070.73 for the 2001,
2002 and 2003, taxation years, respectively;
(k) The Appellant told the auditor for the Canada
Revenue Agency that at the end of the calendar year he would keep about $10,000
in cash in his house to live off until the spring. According to the Appellant,
when he would resume his business activities in the spring, he would use the
remainder of that amount to start the activities;
(l) The Appellant also told the auditor for the
Canada Revenue Agency that he did not receive insurance benefits during the
taxation years in issue except for the amount paid to him for damages suffered
in an accident involving one of his motor vehicles;
(m) A net worth method audit revealed that the Appellant
omitted to report the business income amounts of $54,856, $40,544 and
$49,423 for the 2001, 2002 and 2003 taxation years, respectively (see
Appendices I to III of this Reply which should be considered to be an integral
part of this paragraph).
12. (a) The facts set out at
paragraph 11 of this Reply;
(b) The Appellant built his house in
Sainte-Odile-sur-Rimouski during the years in issue and did not have any source
of income other than the unreported income to pay for the construction work;
(c) The income reported by the Appellant for the
taxation years in issue are not congruous with the increase in his net worth
and personal expenses;
(d) The Appellant had full knowledge of
his business income as he was the one who took the orders, made the bids, did
the work, received the payments and made the deposits;
(e) The Appellant knowingly, or under circumstances amounting to gross
negligence, made, false
statements or omissions in his tax returns for the
taxation years in issue;
(f) The amounts of unreported income involved was
such that the Appellant could not have been unaware of having omitted to report
the initial income amounts or having made a false statement in filing his tax
returns for the taxation years in issue.
|
Taxation
year
|
Reported net business income
|
Unreported net business income
|
% Adjustment
|
|
2001
|
$14,543
|
$54,856
|
377%
|
|
2002
|
$15,290
|
$40,544
|
265%
|
|
2003
|
$16,070
|
$49,423
|
308%
|
[2]
Counsel for both
parties agreed that the Respondent would open its case first. Ms. Lévesque commenced
an audit of the Appellant’s affairs for the taxation years in question by
travelling to his principal residence situated in Rimouski. During her visit,
the Appellant provided the auditor with notebooks for each of the taxation
years. The notebooks were filed as Exhibit I-3. Ms. Lévesque testified
that the notebooks were not kept as business records and that instead the
Appellant used the notebooks to write down the names of clients, their
telephone number as well as the amount estimated for the work. She noted that the
Appellant did not have any other books or business records, nor did he keep
copies of the invoices he prepared for his clients or his purchase invoices.
[3]
Ms. Lévesque obtained
directly from several banking institutions all of the Appellant’s account statements.
She proceeded to analyze the deposits into the Appellant’s various accounts for
the taxation years in question. She provided a breakdown of these accounts in
Appendix 3 filed as Evidence I-2. Following her analysis of the deposits and
withdrawals from the bank accounts, Ms. Lévesque noted net adjustments of
$13,657 for the 2001 taxation year, $33,315 for the 2002 taxation
year and $46,896 for the 2003 taxation year.
[4]
Following this initial
observation, Ms. Lévesque testified that she decided to determine the
Appellant’s income for the three taxation years using the net worth method. The
detailed calculations are shown in Appendices 1, 2 and 3 as Exhibit I-2.
First, Ms. Lévesque prepared a balance sheet for the Appellant. She recorded
the Appellant’s business assets which were of the order of $5,432, $3,903,
$2,813 and $2,033 for the 2000, 2001, 2002 and 2003 taxation years,
respectively. For each of those years, she calculated the assets held
personally by the Appellant. Among the principal assets held personally by the
Appellant was a cash balance of $10,000 which he kept in his house each year,
and debit balances credited to banking institutions. Ms. Lévesque added to
that the value of the Appellant’s first house in Les Hauteurs close to
Rimouski, as well as the cost of his second house whose construction began in
2001. Ms. Lévesque noted that the value of the Appellant’s asset increased
significantly between 2000 and 2003. In December 31, 2000, the value of the
Appellant’s asset was $83,616. At the end of the 2003 taxation year, the value
of the Appellant’s asset rose to $185,772. The main reason for the increase in
the asset’s value was the construction of the Appellant’s house situated in
Rimouski. Ms. Lévesque explained that she received from the Ministère du
Revenu du Québec copies of all the invoices the Appellant submitted to obtain
available credit for the construction of a new house. In total, that house cost
$112,309. The Appellant had no debts in 2000 and 2001. In 2002, he obtained, by
contract, a loan of $15,000 to build his house. At the end of the 2003
taxation year, that personal loan was reduced to $4,123. Following this initial
calculation, Ms. Lévesque noted that the Appellant’s net worth had
increased by $56,359 in 2001, $23,075 in 2002 and $18,597 in
2003.
[5]
Ms. Lévesque
testified that after reviewing the bank accounts, she adjusted the Appellant’s
net worth appearing in Appendix 1 as Exhibit I-2 so as to add net adjustments
resulting from the analysis of the bank deposits. For the 2001 taxation year,
the net adjustment was $13,657. For the 2002 taxation year, the net adjustment
was $33,315. Finally, for the 2003 taxation year, the net adjustment was
$46,896. This last calculation allowed Ms. Lévesque to complete Appendix
III which establishes the amount of the Appellant’s unreported net business
income shown in the third column of paragraph 12(f) of the Reply to the Notice of
Appeal.
[6]
Ms. Lévesque met
with the Appellant at the offices of the Canada Revenue Agency (CRA) to show him
the calculations indicated as Exhibit I-2. She asked the Appellant if he had
other invoices that he omitted to give to her. He did not provide
Ms. Lévesque with details about other expenses.
[7]
According to
Ms. Lévesque, it was the considerable gaps determined by the net worth
method between the net income reported by the Appellant and the unreported
income detected by Ms. Lévesque that prompted her to assess a penalty
under subsection 163(2) of the Income Tax Act (the Act).
[8]
The Appellant testified
in his case. At first, he explained that he was native of Les Hauteurs close to
Rimouski. He testified that he left school very early, that is to say, after
his fifth year, and that at age 14 he worked with his father on the family
farm. He held that job for six to seven years.
[9]
Subsequently, he worked
at a garage in Les Hauteurs until the age of 20.
[10]
He got married in 1968
and had his first child in 1969. He had a second child in 1970. When he left
Les Hauteurs, he held a job as a custodian at a hunting and fishing club. He
and his children lived with his employer until his youngest child was fourteen
years old.
[11]
He returned to Les
Hauteurs to work for the municipality. At the time, his youngest child started
school.
[12]
With the help of one
his brothers, he built his first house in Les Hauteurs in which he lived for
many years and which he eventually sold for $40,000 after the period in
question.
[13]
He explained to the
Court that in about 1974 he worked as a porose operator in James Bay. He testified that he held that job for seven and a
half to eight years, from 1975 to 1982. He would work each year for a period of
seven to eight months after which he would go back to Les Hauteurs. He stated
that that job allowed him to accumulate a nest egg of about $55,000 to
$80,000.
[14]
In about 1982, the
Appellant returned to Les Hauteurs where he worked for two to three years
in the construction industry. He testified that in 1982 he came up with the
idea to recycle asphalt derived from road maintenance works in
Les Hauteurs to pave his driveway. To that end, he built a home-made boiler to
which he added a propane flamer. He reheated the recycled asphalt to melt it
and used the melted asphalt to pave his driveway. That is how his business was
born.
[15]
The news travelled by
word of mouth and the neighbours in Les Hauteurs asked him if he could use the
recycled asphalt to pave their driveway. Toward the end of that year, he had a
visit from a citizen of Rimouski who asked him if he could pave the driveway at
his house which was located in the neighbouring city.
[16]
The Appellant explained
to the Court that he worked alone in his own business. As his business grew,
the purchaser acquired used equipment, including a truck, a roller and a
loader. He also built a larger boiler that could hold larger quantities of
recycled asphalt.
[17]
He testified that he
worked in collaboration with one Mr. Banville. Mr. Banville would
prepare the driveway when necessary to allow the Appellant to then proceed with
the laying of the asphalt.
[18]
He explained that it
was possible for him to work between June 15 and September 15, but only if
the weather permitted. In 2001, he commenced construction of his current
principal residence. He testified that, first, he cut his wood which was then
sawn. The construction period lasted from 2001 to 2003.
[19]
He testified that the
amount of cash he kept in his house had increased since the time he worked in
James Bay. The amount increased to approximately $138,000. At his first meeting
with the auditor at his house and when he met with her at the CRA’s offices, he
admitted to having omitted to mention to the auditor that he kept that
substantial amount of cash in his house at the beginning of 2001.
[20]
After his meeting at
the auditor’s office in Rimouski, the Appellant testified that his accountant
told him that he should consult a tax expert. He met with a tax expert and
explained his situation to her. The tax expert apparently told him that he
should have mentioned to the auditor that he kept that substantial amount of money
in his house which he used to build his principal residence from 2001 to 2003.
[21]
The Appellant was asked
a number of questions on cross-examination. The Court asked him to explain the
events surrounding his divorce from his first wife in 1992. In answering those
questions, he admitted that his first wife knew that in 1992 he kept about
$80,000 in cash in his house.
[22]
The Court asked him if
his first wife asked him to divide that money during the divorce proceedings.
He answered “no.” His wife was said to have rather accepted his offer to pay
her half of the value of his first house located in Les Hauteurs.
According to a notarial deed, filed as Exhibit I-1, that house was only sold in
2004 for $40,000. According to the Appellant, it was not until that time that
he paid his first wife one-half of the proceeds from the sale of the
house.
[23]
Later, the Appellant
said that he lived in Rimouski with his second wife with whom he had a third
child. He stated that his second wife threatened to sue him for support
payments for their daughter born of the common-law marriage. He did not tell
the Court whether she knew that he kept a substantial amount of cash in his
house or if she knew where the funds used to build his house came from.
[24]
The Appellant admitted
that the only loan he took out to build his house was for a sum of about
$15,000 which he obtained from the caisse populaire.
[25]
On cross-examination,
counsel for the Respondent showed the Appellant the notebooks in which the
Appellant entered bids. Since counsel for the Appellant did not consider it
advisable to tender those documents in evidence during the
examination-in-chief, counsel for the Respondent decided to do so. The
notebooks were filed in the Court record as Exhibit I-3.
[26]
The Court could tell
that the notebooks were far from being clear. There were circled telephone
numbers, names, as well as, on certain pages, the Appellant’s address and an
estimate for the Appellant’s work. The margin of certain pages contained a
record of hours. The Court asked the Appellant to explain what those notes
meant. The Appellant explained that those notes sometimes indicated the number
of hours spent with his clients. The Court must note that, considering the
state of the notebooks in question, it was impossible for the auditor to draw
any conclusions except that the Appellant did not meet his duty to keep
accounting records that could have enabled the auditor to verify the gross
income and expenses of the Appellant’s business.
[27]
Counsel for the
Appellant did not deem it advisable to offer in evidence any other accounting
document or income and expense reconciliation statement for the years in
question.
Analysis
[28]
Counsel for the
Appellant essentially raised two issues to challenge the Respondent’s
assessment.
[29]
First, he argued that
it was unlikely that the Appellant could have earned a net income corresponding
to that established by the CRA. He submitted that the Appellant’s testimony
demonstrated that the Appellant always worked alone and that it would have been
impossible for him to earn such a high gross income during the short summer
period.
[30]
Then, he argued that
the CRA auditor could have established the Appellant’s net income using the
notebooks. He noted that the auditor did not deem it advisable to use that
methodology and did not ask the Appellant any questions to help him in that
regard.
[31]
Finally, counsel for
the Respondent took note of the fact that it took the Appellant many years to
accumulate a significant amount of cash that he kept in his house with a view to
fulfilling his dream of building a house in Rimouski.
[32]
Counsel for the
Appellant noted that the Appellant co-operated with the auditor during their
meetings and that he did not dispose of his property to evade recovery
proceedings by the Minister. In that regard, he pointed out to the Court that
both the CRA and the Ministère du Revenu du Québec registered a legal hypothec
on the Appellant’s principal residence. The Appellant did not object to the
registration of the legal hypothecs. That conduct revealed a willingness to
co-operate with the authorities and not an attempt to shirk his obligations. He
recognized that the Appellant failed to meet his duty to keep accounting
records, but, given the low level of schooling he had, that was understandable
under the circumstances.
[33]
As for the penalty,
counsel for the Appellant noted that his client always co-operated with the CRA
during the audit.
[34]
The Court is of the view
that the Appellant failed to meet his duty to keep proper accounting records
that could have allowed the CRA to verify the Appellant’s net income without
having to proceed by way of the net worth method. First, the Court notes that
the notebooks were unintelligible to a third party such as the auditor. It is
not the CRA’s responsibility to try to reconstruct a taxpayer’s net income from
improper documentation.
[35]
In addition, the Court is
of the view that the Appellant could have tried, with the help of a tax expert,
to redo the Appellant’s financial statements, which could have perhaps helped
the Court understand the evolution of the Appellant’s net income during the
period in question. The Appellant and his counsel did not deem it advisable to
seek the services of an accountant or a tax expert for that purpose.
[36]
Moreover, the Court
notes that the Appellant did not prepare any invoices for his clients. At least
the Appellant did not file any exhibits with the Court. In a
self-assessment system, the onus is on taxpayers to do the bookkeeping, which,
at a minimum, could enable the CRA to conduct its audit.
[37]
The Court finds the
Appellant’s testimony that he kept a significant amount of money in his house
for many years implausible. It is unlikely that in the course of the divorce
proceedings in 1992, his ex-wife neglected to make a request for the division
of that asset and waited many years only to receive one-half of the proceeds
from the sale of the house in Les Hauteurs which took place in 2004. If she did
not seek the division of that considerable asset, it is because the Appellant
did not accumulate the funds, contrary to what he testified in chief.
Moreover, if the Appellant had accumulated funds after holding a job in James
Bay in respect of which he reported the net income to the auditor, why would he
have kept those funds in his house and risk having them stolen or losing them
in a fire? The Appellant claimed that he kept the funds in a can. The funds did
not enjoy any form of protection. Finally, the funds did not generate any
interest for the Appellant.
[38]
I note the following
findings of Tardif J. in Ruest v. Canada, [1999] T.C.J. No. 586
(QL):
27 Since the assessments resulted from the observed
discrepancy between income and expenses relative to capital or assets, the
burden was solely on the appellant to explain that discrepancy. To convince the
Court, he had to show on the balance of evidence that his claims were
plausible, reasonable, correct and coherent. It was not enough to criticize and
raise certain minor grievances in order to enable the Court to conclude that
everything balanced as a result of the amount received at a particular moment.
28 This, I agree, might have required a colossal
amount of work, but it should nevertheless be pointed out that a taxpayer
assessed by means of the net worth method is himself responsible for the manner
in which he has been assessed in that he deliberately and knowingly chose not
to have any accounting system and to keep no record of his income and expenses.
[39]
I find that the
evidence adduced by the Appellant, with respect to his submission that he accumulated
considerable savings over the course of the previous years, to explain the gap
of over $104,000 determined by the auditor for the 2001, 2002 and 2003
taxation years, is insufficient to establish on a balance of probabilities that
the assessments in which a portion of that amount was added to the income of
each of those years are incorrect.
[40]
The gap between the
reported net business income and the unreported business income is very
significant. For 2001, the unreported income is equivalent to 377% of the
reported income. For 2002, the unreported income is equivalent to 265% of the
reported income. Finally, for 2003, the unreported income is equivalent to 308%
of the reported income. The Court finds that the Respondent discharged the onus
of proof imposed on the Respondent under subsection 162(3) as the Appellant
knew or should have known that the reported net income represented only 25% to
33% of the business income earned during each of the years in question. In that
regard, I follow these comments of Pelletier J.A. of the Federal Court of
Appeal in Lacroix v. Canada, 2008 FCA 241:
30 The facts in evidence in
this case are such that the taxpayer’s tax return made a misrepresentation of
facts, and the only explanation offered by the taxpayer was found not to be
credible. Clearly, there must be some other explanation for this income. It
must therefore be concluded that the taxpayer had an unreported source of
income, was aware of this source and refused to disclose it, since the
explanations he gave were found not to be credible. In my view, given such
circumstances, one must come to the inevitable conclusion that the false tax
return was filed knowingly, or under circumstances amounting to gross
negligence. This justifies not only a penalty, but also a reassessment beyond
the statutory period.
. . .
32 . . . 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 or her reported income and his or her net worth, the Minister has
discharged the burden of proof on him within the meaning of subparagraph
152(4)(a)(i) and subsection 162(3).
[41]
For all these reasons,
I dismiss the appeal for the 2001, 2002 and 2003 taxation years.
Signed at Ottawa, Canada, this
28th day of November 2008.
“Robert J. Hogan”
Translation
certified true
on this 16th day
of May 2009.
François Brunet,
Reviser
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