Citation: 2006TCC23
Date: 20060228
Docket: 2003‑1890(IT)G
BETWEEN:
FRANÇOIS HOULD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR
JUDGMENT
Bédard J.
[1] The Appellant disputes
the reassessments made by the Minister of National Revenue (the
"Minister") using the net worth method for the years 1994 to 1997
(the "relevant period"). The Minister added to the Appellant's income
unreported income of $34,550 in 1994, $73,604 in 1995, $62,697 in 1996 and
$39,969 in 1997, in accordance with the details provided in Annex A of the
Reply to the Notice of Appeal, and assessed a penalty under
subsection 163(2) of the Income Tax Act (the "Act")
for each of those years. The assessments were made after the normal
reassessment period, but counsel for the Appellant stated at the hearing that
he would not dispute their validity by arguing that fact. He also agreed to
emphasize that counsel for the respondent admitted at the start of the hearing
that the Minister should have added unreported income of $58,697 (instead of $62,697)
to the Appellant's income for 1996.
[2] The Appellant contends
that the Minister made errors in computing his income using the net worth
method. To make it easier to understand the points at issue, I append hereto
Annexes C and D of the Reply to the Notice of Appeal, which are a summary
of calculations made by the Minister to determine the Appellant's unreported
income, and Annexes A and B of the notice of appeal, which are a summary
of calculations made by the Appellant to determine his unreported income.
[3] The aforementioned
errors include the following:
(i) the absence of certain debts, in particular a $25,000
loan that Guy Lemoyne allegedly granted to the Appellant in 1994, as well
as a $35,000 loan that the Caisse populaire Coaticook allegedly granted him in
1995;
(ii) the addition of drawings: the Minister determined that
most of the Appellant's drawings
from Distribution F.H. Enr., Circuit M.H. Inc., Gérard Prévost
Inc. and withdrawals from his personal bank accounts and credit cards constituted
consumer expenses of the Appellant during the relevant period; the Appellant
contended that the method thus used by the Minister to establish his cost of
living was entirely unreasonable and illogical in the circumstances. The
Appellant moreover determined his own cost of living using data published by
Statistics Canada (Exhibit A‑1).
Background
[4] In 1994 and 1995, the
Appellant operated an automotive tools and parts sales business under the trade
name "Distribution F.H. Enr." ("Distribution"), also
known by the trade name "Promotions F.H. Enr.". The Appellant
terminated the activities of Distribution in 1995. During that year, the
Appellant transferred the inventory from Distribution to Gérard Prévost
Inc., which operated an automotive parts sales business in Lennoxville. The
shares of Gérard Prévost Inc. had been acquired in 1995 by 9023‑7256
Québec Inc., the shares of which were held equally by the Appellant and his
father. In 1994, the Appellant began operating a race track in the municipality
of Coaticook. That business was operated by the Appellant personally, and the
income from it was included in the income of Distribution. Toward the end of
1994, the race track was operated by Circuit M.H. Inc.
("Circuit").
[5] The Minister used the
net worth method to determine the Appellant's unreported income because, on the
one hand, he had noticed that the Appellant had made a large number of cash
transactions and, on the other hand, the Appellant kept few of the vouchers
necessary to reconcile the various accounts in the financial statements of his
corporations and businesses.
Analysis
Burden of Proof
[6] First of all, the Court
must consider the burden of proof, which is on the Appellant in his appeals. My
colleague, Tardif J., had occasion to consider the burden of proof in a
matter involving a net worth evaluation, as is here the case.
[7] In Bastille v.
Her Majesty the Queen, 96‑4370(IT)G, December 9, 1998,
99 DTC 431, 4 C.T.C. 2155, he wrote, at
paragraphs 5 ff.:
[5] I think it is important to point out that the burden of
proof rests on the Appellants, except with respect to the question of the
penalties, where the burden of proof is on the respondent.
[6] A NET WORTH assessment can never reflect the kind of
mathematical accuracy that is both desired and desirable in tax assessment
matters. Generally, there is a certain degree of arbitrariness in the
determination of the value of the various elements assessed. The Court must
decide whether that arbitrariness is reasonable.
[7] Moreover, use of this method of assessment is not the rule.
It is, in a way, an exception for situations where the taxpayer is not in
possession of all the information, documents and vouchers needed in order to
carry out an audit that would be more in accordance with good auditing
practice, and most importantly, that would produce a more accurate result.
[8] The bases or foundations of the calculations done in a net
worth assessment depend largely on information provided by the taxpayer who is
the subject of the audit.
[9] The quality, plausibility and reasonableness of that
information therefore take on absolutely fundamental importance.
[8] Another of my
colleagues, Bowman J. (as he then was), made the following comments in Ramey v.
The Queen, 91‑547(IT), April 20, 1993, T.C.J. No. 142
(Q.L.), [1993] 2 C.T.C. 2119, 93 DTC 791:
I am not unappreciative of the enormous, indeed virtually
insuperable, difficulties facing the Appellant and his counsel in seeking to
challenge net worth assessments of a deceased taxpayer. The net worth method of
estimating income is an unsatisfactory and imprecise way of determining a
taxpayer's income for the year. It is a blunt instrument of which the Minister
must avail himself as a last resort. A net worth assessment involves a comparison
of a taxpayer's net worth, i.e. the cost of his assets less his liabilities, at
the beginning of a year, with his net worth at the end of the year. To the
difference so determined there are added his expenditures in the year. The
resulting figure is assumed to be his income unless the taxpayer establishes
the contrary. Such assessments may be inaccurate within a range of
indeterminate magnitude but unless they are shown to be wrong they stand. It is
almost impossible to challenge such assessments piecemeal. The only truly
effective way of disputing them is by means of a complete reconstruction of a
taxpayer's income for a year. A taxpayer whose business records and method of
reporting income are in such a state of disarray that a net worth assessment is
required is frequently the author of his or her own misfortunes.
[9] In the instant appeals, Denis Simard,
a supervisor with the Canada Customs and Revenue Agency (the
"Agency"), was the only person to testify in support of the
Minister's position. It should be pointed out that Mr. Simard was the
supervisor of Ginette Leblond, who acted as auditor for the Agency in the
instant case. Ms. Leblond did not testify at the hearing. The Appellant
testified. Guy Lemoyne, Lyne Émond and the Appellant's father also testified
in support of the Appellant's position. I wish to emphasize that I did not
consider Ms. Émond's testimony, as she stated that she had begun working
for the Appellant's accounting office in 2000 and was thus unable to provide
any explanations for the relevant period.
[10] In assessing the evidence
provided by the Appellant, the Court must comment on the failure to call
certain persons as witnesses and to provide the documentary evidence that could
have confirmed the Appellant's statements. In Huneault v. The Queen,
98 DTC 1488, my colleague, Lamarre J., recalled, at
paragraph 25, remarks made by Sopinka and Lederman in The Law of
Evidence in Civil Cases which were cited by Sarchuk J. of our Court in
Enns v. M.N.R., APP‑1992(IT), February 17, 1987, 87 DTC
208, at page 210:
In The
Law of Evidence in Civil Cases, by Sopinka and Lederman, the authors
comment on the effect of failure to call a witness and I quote:
In Blatch v. Archer,
(1774), 1 Cowp. 63, at p. 65, Lord Mansfield stated:
'It is certainly a maxim that all evidence is to be weighed
according to the proof which it was in the power of one side to have produced,
and in the power of the other to have contradicted.'
The
application of this maxim has led to a well‑recognized rule that the
failure of a party or a witness to give evidence, which it was in the power of
the party or witness to give and by which the facts might have been elucidated,
justifies the court in drawing the inference that the evidence of the party or
witness would have been unfavourable to the party to whom the failure was
attributed.
In the
case of a plaintiff who has the evidentiary burden of establishing an issue,
the effect of such an inference may be that the evidence led will be
insufficient to discharge the burden. (Lévesque et al. v. Comeau et al. [1970] S.C.R.
1010, (1971), 16 D.L.R. (3d) 425.)
General Assessment of Appellant's Credibility
[11] In the instant case,
before analyzing the relevant facts in detail, it is useful to make certain
general comments on the credibility of the Appellant, who, I would recall, was
virtually the only person (with the exception of Mr. Lemoyne and his
father) to testify in support of his appeal. I emphasize that the Appellant
actually filed only two documents in support of his position, a contract to
purchase the shares of Gérard Prévost Inc. (Exhibit A‑3) and a
contract entered into by Clément Lavoie and the Appellant (Exhibit A‑4).
In my view, it would be hazardous to lend the Appellant's testimony any
credence without any conclusive corroborating evidence in the form of
documentation or testimony by credible witnesses.
[12] The Appellant's answers
were generally vague, imprecise and ambiguous. All too often in
cross-examination, he was unable to provide any valid explanation of his
operations; he constantly repeated that only his in‑house and outside
accountants, who, I note again, did not come and testify, were able to give
valid explanations. Not only were his answers generally vague and imprecise,
they were at times contradicted by documentary evidence. For example, the
Appellant testified that he had worked for Gérard Prévost Inc.
from 1995 to 1997 and that, in that capacity, he had received a weekly salary
of $500 during that period. However, the Appellant reported no employment
income from that corporation in his returns of income for either of those
years.
Furthermore, in his returns of income for 1996 and 1997, when he was no longer
personally operating a business, the Appellant reported business income for
which he was unable to give any explanation whatever. Of course, the fact that
the events occurred a number of years ago may explain a certain lack of clarity
or memory lapses by the Appellant, but there is a difference between that and
being unable to explain why his employment income did not appear in his returns
of income and being unable to explain the nature of the business he had
personally operated during those years. For those reasons, I attached little
probative value to the Appellant's testimony where not corroborated by sound
documentary evidence or by the testimony of credible witnesses.
Balance Sheet
[13] I note, in Annex A
of the notice of appeal, that the Appellant disputes only two items in the
balance sheet prepared by the respondent. I recall that the first point
disputed by the Appellant is related to a $25,000 loan that Guy Lemoyne
purportedly granted him in 1994, while the second concerns a $35,000 loan that
the Caisse populaire Coaticook purportedly made to him in 1995.
$25,000 Loan
[14] In his notice of appeal,
the Appellant alleged that, in 1994, he had borrowed $25,000 from
Guy Lemoyne, a childhood friend, and had partially repaid that loan in
1997, by handing over a Harley‑Davidson motorcycle worth $9,000. The
Appellant explained in his testimony that the proceeds of the loan had been
used to purchase and install a lighting system for the race track that he
operated. The Appellant also testified that the balance of the loan ($16,000)
had been repaid in cash, in two $4,000 payments in 1997 and two more $4,000
payments in 1998, partly as a result of a loan made to him by his
brother-in-law.
[15] The Appellant's evidence
on this disputed point essentially rested on his testimony and that of his
childhood friend, Mr. Lemoyne, who more or less corroborated the
Appellant's testimony on the matter. The Appellant was unable to support his
testimony with any documentary evidence whatever, as that evidence was
non-existent. I emphasize that the $25,000 cash loan bore no interest and had
no terms of repayment. Lastly, I note that there was no documentary evidence
relating to the repayment of the loan. At best, the evidence showed that a
motorcycle was sold to a third party in 1998 and that it could not have been
handed over to Mr. Lemoyne (in partial repayment of the loan), as the
Appellant had initially contended in his notice of appeal. It would have been
very interesting to hear the testimony of the brother-in-law who allegedly made
a loan to the Appellant in 1997 or 1998, the proceeds of which were purportedly
used to repay the initial $25,000 loan in part in 1997 or 1998. Of course, the
documentary evidence establishing the loan made to the Appellant by his
brother-in-law was non-existent. The Appellant could have submitted documentary
evidence relating to the purchase of a lighting system for the race track. He
had a unique opportunity to base his credibility on adequate documentary
evidence. This he did not do. I infer from this that the evidence would not be
favourable to him. Lastly, the fact that the Appellant did not state at the
objection stage that the $25,000 loan existed was also decisive in my decision
to attach little probative value to the testimony of the Appellant and
Mr. Lemoyne on this point. For these reasons, I find that the Minister rightly
did not consider the $25,000 loan in the Appellant's balance sheet.
$35,000 Loan
[16] Paragraph 12 of the
notice of appeal reads as follows:
[TRANSLATION]
For the purposes of the acquisition of the shares of
Gérard Prévost Inc., the Appellant borrowed $35,000 from the Coaticook
Caisse Populaire Desjardins. Circuit M.H. Inc. was used as a mandatary for
the Appellant for the purposes of taking out the loan, at the request of the
financial institution.
[17] Paragraph 22 of the
written argument of counsel for the Appellant reads as follows on this point:
[TRANSLATION]
The Appellant also argued that he had borrowed $35,000 in
1995 for the purpose of acquiring the shares of Gérard Prévost Inc. The
Appellant contends that Circuit M.H. Inc. acted as his mandatary since the
Coaticook Caisse Populaire did not want to deal directly with him and had also
required a personal guarantee from a certain Clément Lavoie. For the
purpose of demonstrating that an amount of $35,000 should be added to the
liabilities on his balance sheet for net worth purposes, the Appellant filed a
contract dated March 22, 1996, at the hearing as Exhibit A‑3.
That notarial contract states that Clément Lavoie was the
"creditor" and that the Appellant was the "debtor". It also
states that Circuit M.H. Inc. signed a loan contract at the request of the
Caisse Populaire for an amount of $35,000 bearing interest at a rate of
10.25 percent. Mr. Lavoie signed a guarantee for the said loan. The
Appellant contends that the $35,000 should appear in the balance sheet since he
was the debtor under the contract and clause 7 states that he would be
personally in default if he "does not pay, on their respective due dates,
each of the principal or interest payments owed under the terms hereof."
He also contracted a $35,000 hypothec in favour of the Caisse Populaire and
Mr. Lavoie against the property that he personally owned.
[18] The following points
emerge from my analysis of the contract (Exhibit A‑3) signed by
Clément Lavoie and the Appellant on March 22, 1996 (the
"contract"):
(i) Circuit M.H. Inc. signed a contract for a demand
loan in the amount of $35,000 bearing interest at the rate of
10.250 percent per annum granted by the Coaticook Caisse populaire
Desjardins (the "Caisse") dated December 7, 1995;
(ii) Clément Lavoie, the Appellant's creditor under
the terms of the contract, stood surety for Circuit M.H. Inc. in relation
to the Caisse for the amount of $35,000 under the terms of a specific guarantee
signed on December 7, 1995;
(iii) in order to guarantee Mr. Lavoie repayment of any
amounts that he might be required to pay to the Caisse under the terms of the
guarantee, the Appellant (called the debtor for the purposes of the contract)
agreed to the following guarantee: the Appellant assigned and mortgaged to
Mr. Lavoie a property belonging to him, up to a maximum of $35,000.
[19] In my view, the contract
in no way shows that the Appellant was the principal debtor of the $35,000 loan
that the Caisse granted on December 7, 1995. The contract simply shows
that the Appellant would have been Mr. Lavoie's debtor in the event
Mr. Lavoie were required to pay any sum whatever to the Caisse under the
terms of the guarantee that he had given the Caisse on December 7, 1995,
to guarantee repayment of the $35,000 loan made by the Caisse to
Circuit M.H. Inc. that same day.
[20] Ultimately, the
Appellant's evidence that Circuit M.H. Inc. had acted as a mandatary for
the purpose of the $35,000 loan is based solely on the Appellant's testimony.
It is hard for me to lend any credence to the version of the facts given by the
Appellant on this point when the documentary evidence clearly points in the
opposite direction.
[21] I therefore conclude that
the Appellant's balance sheet prepared by the Minister is accurate and that the
Appellant's net worth thus increased by $2,354 in 1994, $10,255 in 1995,
$20,164 in 1996 and $4,126 in 1997.
Consumption Expenditures Established by
Appellant
[22] I would recall that the
net worth method consists briefly in valuing the increase in the taxpayer's net
worth over a given period and adding the taxpayer's cost of living during that
same period.
[23] To establish his
consumption expenses during the relevant period, the Appellant determined his
cost of living using the figures prepared by Statistics Canada and filed in evidence a table
on the matter (Exhibit A‑1). However, Denis Simard testified
that he had not used that method to establish the Appellant's consumption
expenses because he felt that the method was too arbitrary in this case. The
reasons Mr. Simard gave on this point are worthy of note:
[TRANSLATION]
The other method that we could have used was to go about it
arbitrarily taking Statistics Canada figures. Because that's very, very, very
arbitrary. We can't do that; it's … to do that, to do that … to take that
situation, we would have had to be in a situation where the taxpayer had no
bank account and we can't rely on the accounting records of the business. No
figures were recorded and, in other words, there are very few accounting
records.
Q. But that didn't apply in the case at hand?
A. But it didn't apply in our case. It didn't apply.
[24] I note in
Exhibit A‑1 that the Appellant deducted a spousal contribution of
$7,200 from his cost of living for each of the years in the relevant period.
The Appellant testified that he had successively lived with two common-law
spouses during the relevant period. And yet the Appellant did not indicate in
his returns of income that he had had a spouse during the relevant period. Having
regard to the lack of probative value that I attach to the Appellant's
testimony where it is not supported by sound documents or by the testimony of
independent and credible witnesses, I am of the view that the Appellant could
not deduct that $7,200 from his cost of living. Consequently, the Appellant's
cost of living, as it appears in Annex A, would be $17,750, $17,960,
$18,175 and $18,395 for 1994, 1995, 1996 and 1997 respectively, instead of
$10,550, $10,760, $10,975 and $11,195 respectively.
[25] Consequently, if I amend
the amounts in Annex B (summary of calculations made by the Appellant to
establish his unreported income) related to the increase in net worth and to
the item "Mr. Hould's cost of living" to reflect my findings on
these two points,
I find that the unreported income as established by the Appellant in
Annex B would be $24,260 for 1994, $23,543 for 1995, $37,357 for 1996 and
$25,676 for 1997.
Appellant's Cost of Living Determined by the Respondent
[26] The Minister determined
that the withdrawals of Distribution, Gérard Prévost Inc. and
Circuit M.H. Inc. from bank accounts and credit cards were used by the
Appellant for personal consumption purposes. Those withdrawals were added as
adjustments by the Minister in computing the Appellant's unreported income
determined by the net worth method. The Appellant fundamentally contended that
the method the Minister used to establish his cost of living during the
relevant period was utterly unreasonable and illogical in the circumstances.
Bank Account and Credit Card Withdrawals
[27] In particular, the
Minister
added the following items to the Appellant's living costs:
|
|
|
1994
|
1995
|
1996
|
1997
|
|
|
(i) Withdrawals
from Caisse populaire Lennoxville # 10241
|
|
|
$42,726
|
$5,562
|
|
|
(ii) Withdrawals from National Bank
# 0354602
|
|
|
$60
|
$12,647
|
|
|
(iii) Credit
card withdrawals
(Mastercard)
|
$7
|
$671
|
$677
|
$1,656
|
|
|
(iv) Credit card withdrawals
(Visa)
|
___
|
_____
|
$185
|
$1,360
|
|
|
|
$7
|
$671
|
$43,648
|
$21,225
|
[28] In his written argument,
counsel for the Appellant stated the following position on this point:
[TRANSLATION]
The Respondent also added withdrawals from the Appellant's
various bank accounts and credit cards. Those adjustments by the Respondent are
also based on premises that are unreasonable and illogical in the
circumstances. The withdrawn amounts were necessarily used for contributions to
the various entities (Distribution F.H., Circuit M.H. Inc., 9023‑7256
Québec Inc., Gérard Prévost Inc.). The equity of the various entities and
the shareholder's contributions have already been recorded on the Appellant's
balance sheet. Furthermore, those withdrawals may have been used for business
expenses (subsequently reimbursed) for the purchase of other assets recorded on
the Appellant's balance sheet and for payment of the Appellant's debts recorded
on the Appellant's balance sheet.
In short, the respondent cannot assign the title
"personal expenses" to adjustments that result in a triple
accounting…
[29] To state it briefly,
withdrawals can only be used for the purpose of saving (that is to say of
buying assets or paying down debts) or consumption. It is therefore true that,
in principle, withdrawals can be used for savings and that, if this is the
case, we have double taxation, since the savings (that is to say the increase
in net worth) are already recorded on the taxpayer's balance sheet where the
Minister uses the net worth method to determine a taxpayer's unreported income.
[30] It may also be said that,
where withdrawals are greater than the savings already recorded on the
taxpayer's balance sheet, withdrawals not used for savings are necessarily used
to cover the taxpayer's living costs. For example, in 1996, the increase in the
Appellant's net worth was $20,164, and his credit card and bank account
withdrawals totalled $43,646. Consequently, it can be said that the withdrawals
unrelated to savings ($23,482) were used by the Appellant to finance his living
costs.
[31] Even though a portion of
the withdrawals can in principle be linked to savings, the Appellant, on whom
the burden of proof rests, must still show that the withdrawals were used for
that purpose. The Appellant was obligated to show me by means of supporting
documents, in view of his lack of credibility, that withdrawals were used to
purchase assets or to pay debts. Of course, the Appellant could have made cash
withdrawals and used that money for savings purposes. In that case, the
Appellant had to at least show me which assets and liabilities were paid for in
cash.
[32] The Appellant in the
instant case was content to raise assumptions without supporting them with
sufficient evidence. I would point out that the onus of proof was on the
Appellant. I do not feel that the Appellant has been able to discharge the
burden that was on him by merely assuming that he had been taxed twice.
[33] I note that, in his great
generosity, the Minister deducted the following items from the withdrawals:
|
|
|
|
1996
|
|
1997
|
|
|
|
Trans Canada credit payments
|
|
$2,610
|
|
$3,522
|
|
|
|
Amount
allowed (unvouchered)
|
|
$20,685
|
|
$21,016
|
|
It can therefore be stated that these items (the amounts of which were
stated in the vouchers and thus deducted purely arbitrarily) largely offset the
withdrawals that might be related to the savings already shown on the
Appellant's balance sheet for those years.
[34] For these reasons, I find
that the Minister was correct in making these adjustments in his net worth
calculation to determine the Appellant's unreported income.
Drawings from Distribution F.H. Enr.
[35] The Minister determined
that the Appellant had used all the amounts debited from account 26330
(entitled "Drawings") of Distribution (Exhibits I‑15 and I‑16)
for personal consumption purposes. The Minister therefore recorded those
drawings ($62,352 in 1994 and $89,312 in 1995) as adjustments in the net worth
calculation.
[36] The Minister's reasoning
on this point was as follows: had it not been for those drawings from
Distribution, Distribution's equity, which moreover appears on the Appellant's
balance sheet, would have been that much greater. For example, if $62,352 had
not been drawn in 1994, the equity of Distribution as at December 31,
1994, would have been $85,076, not $22,724, and the increase in the Appellant's
net worth for that year would accordingly not have been $2,354, but rather
$64,706.
[37] I note that the Minister
deducted the following amounts from those drawings of $62,352 entered as
adjustments in 1994:
(i) $10,937 in respect of the repayment of a loan;
(ii) $3,650 in respect of payment to Trans Canada Credit;
(iii) $20,000 allocated without vouchers.
[38] I also note that, in
1995, the Minister deducted the following amounts from the drawings of $89,312
entered as adjustments:
(i) $4,272 in respect of payment to Trans Canada Credit;
(ii) $20,360 allocated without vouchers.
[39] Mr. Simard's
explanations of those three adjustment deductions are worthy of note:
[TRANSLATION]
A. No, no, no, no, no. With regard to the repayment
of a loan, in the $62,352.40 …
Q. Yes, yes?
A. … when we did the analysis, we realized that it
included repayments of a loan that had been made within the $62,000; so we
removed them.
Q. Yes.
A. Then the same thing for "Trans‑Canada
Credit payment".
Q. Hm, hm.
A. Okay. That's why. We discovered that those
amounts came from a loan repayment. So they had to be deducted or else the loan
would have been taxed.
[…]
Q. Could you explain to us about the $20,000 that
was allocated without vouchers?
A. Okay.
THE COURT:
Q. And explain to us this outburst of generosity.
A. Yes, that's … Admittedly, what I'm going to
explain to you is that we had a problem in this case. We had a problem, and
that was that everything was mixed up; it was really mixed up, really, and we
lacked vouchers so that we could come and prove a particular item; we were
lacking all sorts of information. We ultimately allocated those amounts to
ensure, simply to ensure that there wouldn't be any money that would have been
used for the business. That's why we deducted $20,000 each year, to make sure
because we couldn't find a method that would enable us to follow a straight
path and say: "That's it." We couldn't. We rarely have a problem like
this because there's a registered business; there are two companies. We saw
that everything was mixed up. So, we said, we really want to be sure. And I
remember it was I who asked the auditor to put in that amount because he didn't
agree with it. I wanted to be sure we didn't penalize him. It was simply for
that, in order to arrive at reasonable figures. Quite simply, that was it.
Q. So ultimately, $20,000 for… that's an amount that
would have been used for the purposes of the businesses or…
A. In case… Because we said to ourselves: he may
have taken the money from the business, but ultimately that wouldn't have been
shown. That might be possible. That's still in the realm of the possible. So to
be sure that we didn't tax excessively, we put in that amount, which is
completely arbitrary, and there's no further explanation on that. Why aren't
they equal? That’s because we…
Q. The cost of living?
A. Yes, there's inflation.
Q. Indexed generosity.
A. Generosity… that's it.
Q. Hey, that's going to look good in my judgment:
indexed generosity.
[40] Counsel for the
Appellant's written argument on the drawings is as follows:
[TRANSLATION]
The
amounts that are part of the Respondent's net worth calculation, which are
entitled "Expenses paid by Promotion FH", $62,352.40 (1994) and
$89,312.19 (1995) respectively, cannot be added since those amounts are recorded
at least three times, in particular for the following reasons:
‑ the
auditor admitted that the balance of the "Drawings" account (I‑15
and I‑16) was taken into account for the purposes of the net worth
determination since that account is part of the calculation of the "Equity
in Distribution FH" entry on the Appellant's balance sheet; the
amounts entered under the heading "Equity in Distribution FH" on
the Appellant's balance sheet for the various years are not disputed;
‑ the
auditor admitted that he had added to the net worth calculation under the
heading "Expenses paid by Promotion FH" the drawings entered in
the debit column only of the "Drawings" account (Exhibits I‑15
and I‑16) in the amounts of $63,352 and $89,312 for 1994 and 1995,
respectively;
‑ those
amounts have the same effect as calculating withdrawals from a personal bank
account without regard to an analysis of deposits;
‑ it
is clear from the analysis of the "Drawings" account for 1994 and
1995 that the Appellant withdrew amounts according to various situations, such
as, for example, to repay businesses expenses, after making personal
contributions, for transfers to other accounts (credit card, personal account,
loan, etc.);
‑ the
Appellant reported total sales of $162,237 for 1994 (Exhibit I‑14),
and some of the receivables recorded in his sales were entered in the
"Drawings" account;
‑ the
auditor admitted in his testimony that the balance of the "Drawings"
account is not really significant since the Appellant's contributions correspond
entirely, or almost entirely, to the various withdrawals for the same period;
for example, the balance for 1995 is a debit of $953.31 (Exhibit I‑16);
‑ it
appears from Exhibit I‑17 (excerpt from account 24030) that
transfers of funds were made between Circuit M.H. Inc. and
Distribution F.H. for 1995, thus confirming the Appellant's testimony;
‑ these
drawings (debit column) were necessarily used for subsequent contributions
(credit column), for the payment of debts, for the payment of credit cards, for
the reimbursement of business expenses, for the purchase of assets that were
considered in establishing the equity in "Distribution FH" or to
establish the Appellant's balance sheet, and so on.
[41] Counsel for the respondent's
written argument on the drawings is as follows:
[TRANSLATION]
Distribution FH Enr.
57. On the balance sheet of Distribution FH,
Exhibit I‑13, the Minister has taken the figures from that balance
sheet, as it appears, from Exhibit I‑1 and from the amount of equity
in Distribution FH Enr. appearing on François Hould's balance sheet,
Exhibit I‑2.
58. A question arises concerning drawings on account
#26 330, Exhibits I‑15 and I‑16, as to why the
accountant's same figures would not then be accurate.
59. It is important to recall that the drawings from the
business redeposited to his personal account were not considered in the
adjustments since they were included in the withdrawals from his personal
account.
60. Contrary to what the Appellant claims, it is not
clear that the analysis of the drawings account shows that repayments were made
to the advance account since the taxpayer was unable to justify the business
expenses that he paid and that were reimbursed to him by the business.
61. The analysis of the advance account does not show
the following entries:
Example:
Purchase of automotive parts $1,232.57
Maintenance and repairs $ 620.32
Shareholder advance $1,852.89
On the contrary, we note the following entries:
Bank $1,500.00
Advance $1,500.00
(This entry represents a shareholder contribution.)
62. Furthermore, as in the example cited above, we found
that most of the reimbursements were for amounts such as $500 or $1,000.
Consequently, it is inconceivable from an accounting standpoint that the Appellant
could have been reimbursed for amounts paid in cash.
63. Furthermore, we do not deny that the taxpayer paid
for expenses in cash within the business, but we are saying that they were not
entered in the advance account since most of the transactions were made in
cash.
64. In view of the fact that the audit was conducted on
a net worth basis, all the reimbursements made by the Appellant were taken into
account in his balance sheet. Thus, if we had not considered the
reimbursements, the balance would be higher, resulting in an increase in net
worth and additional income.
[42] It is possible
that some assets acquired by the Appellant in 1994 and 1995 and the payment of
certain debts by the Appellant during those years were financed by these
drawings, in which case there would have been double taxation since the savings
(purchase of assets or payment of debts) were already recorded on the
Appellant's balance sheet when the Minister used the net worth method to
establish the Appellant's unreported income. I note, however, that the
Appellant's net worth increased by $2,364 in 1994 and $4,255 in 1995, whereas
the drawings in question were $62,352 in 1994 and $89,312 in 1995. So only a
portion of the drawings can have been used for savings. Even though a portion
of the drawings can be related to savings, the Appellant, on whom the burden of
proof rests, must nevertheless prove that drawings were used for that purpose.
[43] In his written argument,
counsel for the Appellant stated a number of other assumptions to show that
these drawings, which the Minister entered as adjustments, were counted at
least three times. It is my view that the Appellant could not discharge the
burden that was on him on this point by making assumptions that he had been
taxed three times without supporting those assumptions with adequate proof.
Most of the Appellant's explanations
on certain amounts debited from account 26330 were vague and imprecise.
One cannot discharge one's burden of proof by answering, "It's
probably…", "That's no doubt an entry error", "I'd have to
recheck my invoices", and "I would absolutely have to check the
accounting at the time to see what was a subsidy by them."
[44] I would point out that
the Minister deducted from these drawings entered as adjustments certain
amounts for the repayment of certain debts of the Appellant. Lastly, I note
that the Minister generously deducted an amount of $20,000, which was indexed,
from those drawings, and did so on a purely arbitrary basis.
[45] For these reasons, I
conclude that the Minister rightly made those adjustments in computing the
Appellant's net worth.
Drawings from Circuit M.H. Inc.
[46] The Minister established that certain expenses incurred
by Circuit M.H. Inc. (that is $266.86 in 1994, $3,919 in 1995, $23,163.75
in 1996 and $34,999.87 in 1997) were expenditures made by that company on
behalf of the Appellant, not expenses incurred by Circuit M.H. Inc. for
the purpose of earning income from its business. The Minister therefore added
those expenses to the Appellant's living costs. In his testimony,
Mr. Simard explained that those expenditures made by Circuit M.H.
Inc. on behalf of the Appellant had been debited from account 24010
entitled, "Owed to Frank Hould" (Exhibit I‑17). The
underlying reasoning of the Minister's position on this point is as follows: if
these expenses had not been made by Circuit M.H. Inc., the balance of the
account appearing in the Appellant's balance sheet (Annex C) would have
been that much higher. Mr. Simard cited the example of 1996, for which the
balance sheet shows that Circuit M.H. Inc. owed the Appellant $19,534 at
December 31, 1996. Mr. Simard explained that, if the personal
expenses had not been paid by Circuit M.H. Inc. on behalf of the Appellant
in 1996 and debited from account 24010 entitled "Owed to
Frank Hould" (Exhibit I‑17), the balance of the account
appearing on the Appellant's balance sheet would not have been $19,534, but
rather $42,197 ($19,534 + $23,163). In short, it can be said that, had it not
been for those expenses of $23,163 made for the Appellant in 1996, there would
have been an additional increase of $23,163 in the Appellant's assets for that
year.
[47] The Minister's reasoning on
this point is logical in my view. However, in his testimony, Mr. Simard
merely identified for 1994 the three expenditures ($266.66) that were
purportedly incurred by Circuit M.H. Inc. on behalf of the Appellant. I do
not find that these expenditures were clearly made by Circuit M.H. Inc. on
behalf of the Appellant, particularly since the Appellant provided no
explanation concerning those expenditure.
[48] However, for 1995, 1996
and 1997, Mr. Simard did not identify the drawings from account 24010
entitled "Owed to Frank Hould" of Exhibit I‑17, which
constituted expenditures made by Circuit M.H. Inc. on behalf of the
Appellant. Despite a thorough examination of account 24010, it was
impossible for me to determine how the Minister had established that
Circuit M.H. Inc. had incurred expenditures on behalf of the Appellant
totalling $3,969, $23,163 and $34,999 for 1995, 1996 and 1997 respectively. The
evidence adduced by the Minister was simply insufficient and inadequate to
convince me that Circuit M.H. Inc. had made such expenditures for the
Appellant's benefit. In the instant case, the Minister had to at least identify
those expenditures so that the Appellant could dispute the Minister's position.
In my view, the Minister cannot expect a favourable decision from a judge based
on allegations so imprecise that the taxpayer is not even able to dispute them.
[49] I note in the
"Adjustments" item in Annex D that the Minister deducted the
following amounts from all the drawings:
|
|
|
|
1996
|
|
1997
|
|
|
|
(i)
Trans Canada Credit payments
|
|
$2,610
|
|
$3,522
|
|
|
|
(ii)
Drawings (unvouchered)
|
|
$20,685
|
|
$21,016
|
|
[50] Since I cannot determine
from Mr. Simard's testimony on the two deductions allowed by the Minister
to what drawings items these two deductions are related, it is my view that it
is not unreasonable to conclude that those deductions were not related to the
"Drawings from Circuit M.H. Inc." item, but to all the other
drawings entered by the Minister as adjustments.
Conclusion
[51] Having regard to my
findings
on the three drawings entered as adjustments by the Minister, the Appellant's
living costs (that is to say total additions minus total deductions in the
"Adjustments" item of Annex D) would be $28,644 for 1994,
$62,924 for 1995, $28,282 for 1996 and $9,987 for 1997. The Appellant's
disposable income was thus $30,998 for 1994, $73,179 for 1995, $48,446 for 1996
and $14,113 for 1997. The Appellant's unreported income was thus $34,549 for
1994, $65,762 for 1995, $39,533 for 1996 and $4,969 for 1997.
[52] I concluded in the last
paragraph that the Appellant's living costs (total additions entered as
adjustments minus total deductions entered as adjustments) was $9,989 for 1997.
I find that amount far too low in the circumstances. In my view, the living
costs determined by the Appellant in Annex B for that year should be used,
plus the sum of $7,200,
in establishing the Appellant's unreported income for that year. Having regard
to the Appellant's admissions concerning the other adjustments made by the
Minister, I am of the view that the Appellant's cost of living (total additions
less total deductions in the "Adjustments" of Annex B) was
$30,693 for 1997. The Appellant's disposable income would thus be $34,819 for
1997 and his unreported income for that year would be $25,675.
[53] For these reasons, I find
that the Appellant's unreported income totalled $34,549, $65,762, $39,533 and
$25,675 for 1994, 1995, 1996 and 1997 respectively.
Benefit Conferred by Gérard Prévost
Inc.
[54] In his written argument,
counsel for the Appellant addressed the alternative argument raised by counsel
for the respondent in her written argument, that the amounts of $62,697 in 1996
and $39,969 in 1997 did not come from a benefit conferred by
Gérard Prévost Inc. under subsection 246(1) of the Act, but
rather that they should be taxed under section 3 and subsection 152(7)
of the Act. Counsel for the Appellant contended that that argument
should be rejected, specifically for the following reasons:
(i) the hearing ended on January 19, 2005, without the
Respondent seeking to amend her pleadings and without raising any new
arguments;
(ii) the Respondent cannot, in the circumstances, argue
subsection 152(9) of the Act;
(iii) the Respondent must comply with the rules of natural
justice and the rules of procedure for taxation cases.
[55] In my view, this is a
false argument since the respondent does not have to identify the source of the
Appellant's unreported income where that income is established by the net worth
method.
[56] Furthermore, it seems
clear to me, since subsection 152(9) was added, that the Minister is entitled
to advance an alternative argument even after the normal reassessment period
has expired, subject solely to paragraphs 152(9)(a) and (b).
Consequently, it appears that subsection 152(9) allows the Minister,
subject to the restrictions set out therein, to advance any alternative
argument in support of the amount of the assessment, to the extent that he does
not try to increase that amount. I note that, in the Reply to the Notice of
Appeal, the respondent in any case relied on section 3 and subsections 9(1),
15(1), 152(4) and 152(7) of the Act. Were alternative arguments advanced
by the Minister in the instant case?
[57] Paragraphs 152(9)(a)
and (b) of the Act refer to the harm that the Appellant might
suffer if the respondent were allowed to make alternative factual allegations
many years after the fact.
[58] In the instant case, the
respondent is not trying to consider different transactions from those used to
make the reassessments. Nor is the respondent attempting to increase the amount
of tax payable.
Penalties
[59] There remains the
question of penalties for each of the years of the relevant period. The
respondent contends that they should be maintained for those taxation years.
They were assessed under subsection 163(2) of the Act, which reads
as follows:
163(2) Every person who, knowingly, or under circumstances
amounting to gross negligence, has made or has participated in, assented to or
acquiesced in the making of, a false statement or omission in a return, form,
certificate, statement or answer (in this section referred to as a
"return") filed or made in respect of a taxation year for the
purposes of this Act, is liable to a penalty […]
[60] Subsection 163(3) of the
Act states that the burden of proof is on the Minister. It reads:
(3) Where, in an
appeal under this Act, a penalty assessed by the Minister under this section or
section 163.2 is in issue, the burden of establishing the facts justifying the
assessment of the penalty is on the Minister.
[61] The onus was therefore on
the Minister to establish the facts supporting the assessment of the penalties,
that is, in the instant case, to prove that the taxpayer made a false statement
or omission in a return of income and that that false statement or omission was
made knowingly or under circumstances amounting to gross negligence. The
Minister's burden is not to prove his case beyond a reasonable doubt, but
simply on a balance of probabilities. Raising a reasonable doubt would thus not
be sufficient to cancel the penalty.
[62] I wish to emphasize that
the fact that there is a difference between the increase in the taxpayer's net
worth and the amount of income reported for a year is not in itself sufficient
proof in this regard. The Minister cannot discharge his burden of proof by
merely arguing that the taxpayer was unable to disprove the net worth
assessments. In Dowling v. The Queen, [1996] T.C.J.
No. 301, 93‑934(IT)G, 96 DTC 1250, my colleague
Lamarre J. explained her view on this point as follows at
paragraph 102:
The Minister must present evidence to the
effect that the taxpayer made a false statement or omission in filing the
return. This evidence must amount to more than just showing that the net worth
statement was not disproved. Once the Minister proves, on a balance of probabilities,
that a false statement or omission was made in the return, evidence must be
presented that this misrepresentation was made knowingly or under circumstances
amounting to gross negligence. In Venne, supra, Justice Strayer
defined gross negligence at 6256:
[…]
"Gross negligence" must be taken to involve greater neglect than
simply a failure to use reasonable care. It must involve a high degree of
negligence tantamount to intentional acting, an indifference as to whether the
law is complied with or not.
[…] The sub‑section obviously does not seek to impose absolute
liability but instead only authorizes penalties where there is a high degree of
blamewortheness [sic] involving knowing or reckless misconduct [6258)].
[63] The Appellant signed his
returns of income which were prepared by his accountant. The Appellant cannot
clear himself by pleading ignorance of the errors made by his accountant in
preparing the returns of income. The Appellant should have reviewed his returns
before signing them. By failing to review them, he made a wilful omission. The
Appellant appeared to me to be able to express himself clearly. I believe he
was in a position to know, before signing his returns, whether the amounts
reported were accurate. I note that the Appellant testified that he had been an
employee of Gérard Prévost Inc. from 1995 to 1997 and that, in that
capacity, he had received weekly remuneration of $500 during the period.
However, the Appellant reported no employment income from that corporation in
his returns of income for any of those years. When cross-examined on this
point, the Appellant was unable to explain this omission and simply referred us
to his accountant, Ms. Émond, who, he said, was the only person who could
explain the omission. Furthermore, in his returns of income for 1996 and 1997,
when he was personally no longer operating the business, the Appellant reported
business income for which he was unable to give any valid explanation whatever
as to the nature or origin. It is thus difficult to reach any other conclusion
than that the Appellant displayed a significant degree of wilful negligence in
the filing of his returns of income. In my view, the Minister discharged the
burden of proof on him in the instant case and thus was entitled to assess the penalty
provided for in subsection 163(2) of the Act on the Appellant's
unreported income, which totalled $34,549, $65,762, $39,533 and $25,675 for
1994, 1995, 1996 and 1997 respectively.
[64] Having regard to the
results obtained on both sides, I have come to the conclusion that the Minister
is entitled to 80 percent of the costs.
Signed at Ottawa,
Canada, this 28th day of February 2006.
"Paul Bédard"
Translation certified true
on this 31st day of
July 2006.
Julie
Poirier, Translator
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