Citation: 2006TCC259
Date: 20060504
Docket: 2005-889(IT)I
BETWEEN:
HENRI LOUIS LESSARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This appeal
pertains to the 2000 taxation year. The Appellant has chosen to proceed under
the informal procedure of the Income Tax Act ("the Act")
even though the tax and penalties associated with the reassessment of
October 3, 2002, concerning the 2000 taxation year, exceed the
$12,000 limit.
[2] The subjects in the
case at bar are as follows:
(a) The Minister of National Revenue
("the Minister") made the following corrections to the
Appellant's income upon reassessing him:
|
Description
|
Amount
|
|
T-4 earnings
|
$15,000
|
|
Other income
|
$50,698
|
(b) The
Minister also imposed a late-filing penalty under subsection 162(1) of the
Act and a penalty under subsection 163(2) of the Act.
[3] In order to make
and justify the reassessment under appeal, the Minister relied on the following
facts:
[TRANSLATION]
(a) During the
taxation years in issue, the Appellant was the sole shareholder of H. LS
Lessard Électrique Inc. (hereinafter "the corporation").
(b) The corporation
operated an electrical contracting and maintenance business.
(c) According to
the Registraire des entreprises (CIDREQ),
(i) the
corporation was incorporated on April 6, 1981; and
(ii) the
Appellant was also the president and director of the corporation.
(d) The corporation's
financial year ended on March 31 of each year.
(e) As sole
shareholder, the Appellant prepared the sales invoices, made the deposits and
paid the purchase invoices.
(f) Several
purchases were paid for using cash from sales revenues.
(g) Other purchases
were paid for by cheque.
(h) The documents were
then submitted to Viviane Pépin, who did the bookkeeping and prepared the GST
and QST (Goods and Services Tax and Québec Sales Tax) reports.
(i) Once a year,
all the documents were submitted to an accountant for the preparation of the
corporation's unaudited financial statements and the corporation's income tax
return.
UNREPORTED INCOME
(j) The
corporation issued the Appellant a T5 Statement of Investment Income
(hereinafter "the T5") in respect of the 1999 taxation year. The taxable
amount stated on the T5 was $21,562.50 ($17,250 x 125%).
(k) The Appellant
reported this taxable amount of $21,562.50 as his only income in his 1999
tax return.
(l) For his 2000
taxation year, the Appellant reported the following income from his investments
in the Industrial Alliance Company on his tax return:
|
Description
|
Amount
|
|
Taxable amount of dividends from taxable Canadian
corporation
|
$709
|
(m) The Minister audited
the corporation's records and books as well as the supporting documents, and
the deposit method was used to audit the income for the period from April 1,
1999, to March 31, 2000.
(n) An adjusting
entry was made on March 31, 2000, crediting $45,000 to the "Advance to Director"
account and debiting the same amount from the "Construction Revenue"
account.
(o) The adjusting
entry bore the annotation "non-taxable deposit".
(p) The adjusting
entry was not supported by any vouchers and was not explained to the Minister.
(q) The Minister
proceeded to analyse the deposit slips from the corporation's bank accounts for
the period from April 1, 1999, to March 31, 2000, and found no non-taxable
deposits of $45,000 or any non-taxable deposits that might total $45,000.
(r) The Minister's
auditor proceeded to analyse the "Advances receivable from
shareholder" and "Advances payable to shareholder" accounts in
the general ledger for the period from April 1, 1999, to
March 31, 2000, and the period from April 1, 2000, to
March 31, 2001.
(s) The
Appellant had a balance receivable at March 31, 1999, and received various
amounts between April 1,
1999, and March 31,
2001, including the amount of $45,000, ending up with a $33,072 balance payable
at March 31, 2001.
(t) Consequently,
the Minister's auditor concluded that the Appellant was paid the sum of $45,000
during the 2000 taxation year.
(u) At no point did
the Appellant report this amount in his 2000 tax return.
(v) At no time was
the Appellant able to validly explain the aforementioned amount of $45,000.
(w) The Minister added
the $45,000 to the Appellant's income for his 2000 taxation year as unreported
income.
LOANS NOT REPAID
(x) The Minister's
auditor analysed the records and books of the corporation in order to trace the
advances that the corporation received from and paid to the Appellant during
the 1999 and 2000 taxation years.
(y) The amount of $4,285
from the 2000 taxation year was not reimbursed by the Appellant within one year
after the end of the corporation's taxation year in which the loan was granted
(see Appendix I for details).
(z) The Minister
considered this total of $4,285 for the 2000 taxation year to be a taxable
benefit received from the corporation by the Appellant.
(aa) In addition, the
interest on this loan was computed as $1,413 and added to the Appellant's
income for his 2000 taxation year (see Appendix I for details.)
UNREPORTED SALARY
(bb) The corporation
claimed a $15,000 expense on account of services rendered by the Appellant for
the fiscal year ending March 31, 2001.
(cc) This amount was
entered in the corporation's books as a salary expense for the fiscal year ending
March 31, 2001.
(dd) This amount of
$15,000 was posted to the "Advances payable to shareholder" account.
(ee) This amount was
not included in the Appellant's 2000 tax return.
(ff) The Minister
considered this amount to be salary received by the Appellant for his 2000
taxation year and therefore added it to his income, considering that the amount
of $15,000 was paid to the Appellant (see Appendix I, page 16 of this
Reply).
LATE FILING PENALTY
(gg) For
the 2000 taxation year, the Appellant had $10,094.65 tax payable after the
Quebec abatement was figured in.
(hh) The Appellant
filed his return for the 2000 taxation year on May 10, 2001.
(ii) Since the
Appellant filed his return on that date instead of filing it by the April 30,
2001, deadline, the Minister assessed a late filing penalty of $504.73.
[4] The Appellant, who
had the burden of proving that the assessment, with the exception of the
penalty component, was erroneous, testified in support of his appeal.
[5] He submitted very
succinct evidence, which essentially consisted of an explanation that the
accountant made a mistake in taking the initiative to make an unsubstantiated entry
that stated that he had advanced $45,000 to H. LS Lessard Électrique
Inc. ("the corporation") using funds from a non-taxable deposit.
[6] The Appellant
initially asserted that this was a grave error, and one that he sought to
correct very quickly; but since the Caisse populaire denied him the loan that would
have enabled him to do that, he was unable to correct the situation upon
noticing what he described as an error made by the accountant.
[7] A bit later, on
October 6, 2001, the Caisse populaire agreed to lend him a large amount — more
than $76,000 — which he injected into the corporation that he managed.
[8] Following this
injection of funds, he filed an amended income tax return in order to cancel
the tax consequences of the $45,000 accounting entry.
[9] The explanations
provided were vague, confusing and imprecise. He asserted several times
that the corporation he controlled generally paid him a salary of approximately
$30,000.
[10] However, his income
tax return for the year in issue reports $708.75 in income for the year 2000.
That year, in box 130 of his income tax return, he stated that he drew $15,000
from the corporation. He did not report the $15,000 as income, and the reason
he provided for this was that the corporation had already paid the tax on this
amount.
[11] He also stated that
the renewal of his electrical contractor's licence was subject to the filing of
financial statements that demonstrated the viability of the business that he
controlled. If he did not submit financial statements that met certain
requirements, most likely to establish that the business was financially sound,
he might not have been able to renew a permit that was completely essential to
the operation and very existence of the business.
[12] The Appellant also insisted
that the accountant responsible for the entry offered little cooperation; he
claimed that the bookkeeper quickly noticed that the $45,000 entry was abnormal
and inappropriate, whereupon he tried several times, unsuccessfully, to have
the accountant make the corrections. This is a rather outlandish explanation,
and thus, it lacks credibility. In fact, the Court did not understand why the
Appellant did not call the accountant as a witness given how important he
considered this factor.
[13] Lastly, the
Appellant asserted that his knowledge of accounting was very limited, and
therefore asked for the Court's sympathy given his financial problems, which are
having a serious effect on the financial health of his business.
[14] The Respondent, for
her part, called the auditor to testify. He explained the process followed in
this matter and the basis of the assessment (primarily deposits).
[15] The auditor also
explained the reasons for imposing the penalties; essentially, they were
imposed because the amount of income concealed was quite high in relation to
the amount reported.
[16] First, after
obtaining a copy of the work sheets of the accountant whose services the
Appellant retained, he investigated the nature of the deposits.
[17] This work established
beyond a doubt that the explanations for the $45,000 were baseless and
unjustified. The analysis of the deposits did not validate the explanations to
the effect that the amounts were non-taxable.
[18] In H. LS
Lessard Électrique Inc. v. Canada, No. 2004‑3839(IT)I,
June 1, 2005, [2005] T.C.J. No. 303 (QL), another
matter involving the Appellant in his capacity as sole shareholder, the
Honourable Justice Lamarre Proulx of this Court had to determine the
nature of the $45,000 of the corporation whose shares were held entirely by the
Appellant. She determined as follows at paragraphs 3 and 18:
[TRANSLATION]
3. The reassessment
was based on the inclusion of an amount of $45,000 in computing the Appellant's
income for 2000. The events surrounding the addition of the $45,000 amount in
computing the Appellant's income are described in subparagraphs 4(d) to (h) of
the Reply to the Notice of Appeal (the "Reply") as follows:
. . .
(d) the Minister audited the books and
records of "H.LS Lessard Électrique Inc.", and the deposit
method was used to audit revenues for the fiscal year ending March 31, 2000;
(e) an adjusting entry was made on March
31, 2000, crediting the sum of $45,000 to the "Advances to Director"
account and debiting the same amount from the "Construction Revenue"
account;
(f) the said adjusting entry was
supported by a terse notation: "Non-taxable deposit";
(g) the said adjusting entry was not
supported by any documentation, and no explanation was provided to the Minister
concerning the "Non-taxable deposit" notation;
(h) the Minister analysed the deposit
slips of the corporation's bank account for the period from April 1, 1999, to
March 31, 2000, and found no non-taxable deposits of $45,000 or any non-taxable
deposits that might total the said amount;
. . .
18. In view of the lack of valid evidence
to the contrary and of the Appellant's divergent explanations concerning the
non-inclusion of the amount of $45,000, I can only conclude that the
incorrect entry was made at the request of the sole director of the Appellant.
[19] In the instant case,
the accountant's work sheet (Exhibit I‑2) refers to a non‑taxable
deposit of $45,000 which is described as an advance to the director. However,
despite the auditor's analysis and the various efforts to be told the basis of
such a claim, he was unable to validate the explanation of the accountant, who,
according to the judgment cited above, actually made the entry upon the Appellant's
request.
[20] Why was this done? First
of all, the Appellant admitted that he was late in filing his application to
renew the licence that enabled him to operate his business; since the renewal
application had to be submitted with financial statements showing that the
business was viable, it is reasonable to believe that he instructed the
accountant accordingly, especially since he knew that he would have the
opportunity to recover the amount in question tax-free.
[21] After realizing that
his questionable planning would not yield the results that he had hoped for, he
sought to change his predicament by means of a loan, and invested most of the
proceeds of that loan in his business, after which he claimed this change by
amending his tax return, believing that this would cancel the aspect of the
assessment related to the $45,000 entry.
[22] The Court cannot
accept this approach because the assessment under appeal is in keeping with the
provisions of the Act and with the facts reported in the tax returns.
[23] The Appellant cannot
modify the nature of a transaction after the fact in order to avoid retroactively
the tax consequences of the initial transaction. A taxpayer is free to organize
his affairs in order to reduce his tax liability to a minimum. Such liability
will be determined based on the facts that the taxpayer has supplied and the
facts that are available, not based on hypothetical theories or uncertain
intentions. In other words, assessments are based on actual facts, not on
what a taxpayer wanted or hoped to do.
[24] The amounts that
were added to the Appellant's income for the 2000 taxation year are
considerable. Moreover, the Appellant was clearly negligent and reckless when
he reported only $708.75 in income, knowing full well that this was utterly implausible.
[25] This alone amply
supports a finding of recklessness and disregard that constitutes a solid foundation
for this Court's finding that the Appellant was grossly negligent and that the
penalties under the Act were properly imposed.
[26] There were no
representations concerning the late filing penalty, but the appropriate proof
could be inferred from the filing date itself — specifically,
May 10, 2001.
[27] For all these
reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 4th day of May 2006.
"Alain Tardif"
Translation
certified true
on this 14th day
of February 2008.
Brian McCordick,
Translator
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