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Citation: 2005TCC424
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Date: 20050830
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Docket: 2004-1537(IT)I
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BETWEEN:
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DANIEL BELLEAU,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Angers J.
[1] These are appeals from reassessments in respect of the Appellant's 1998 and 1999 taxation years. In making these reassessments, the Minister of National Revenue ("the Minister") refused to include, in the Appellant's liabilities, an amount of $5,000 for the 1998 taxation year and an amount of $20,000 for the 1999 taxation year. The Appellant allegedly borrowed these two amounts from Sabrina Mansour during each of these respective years. The Appellant is therefore asking that these amounts be subtracted from the additional income that was imputed to him. The Appellant is also challenging the imposition of penalties under subsection 163(2) of the Income Tax Act ("the Act") for each of the years in issue on unreported income of $13,891 and $52,906, respectively.
[2] The Appellant was audited in the fall of 2001. The auditor noticed discrepancies when he tried to reconcile the reported income, so he proceeded to audit the Appellant's income using the "net worth" method. Following this examination, the auditor added $8,006 and $52,329 in additional business income for the respective taxation years in question. The only points in issue are the Respondent's refusal to include the two loans in the Appellant's liabilities, and the Respondent's imposition of the penalties.
[3] The relevant facts of this case date back to late 1997, when the Appellant purchased a massage therapy and tanning business. In fact, it was three businesses operating under different names. The premises of one of these businesses were undergoing renovations and the Appellant was looking for financing. The lenders rejected his loan applications, with the exception of Royal Trust, which granted him an $8,000 loan. In early 1998, he turned to his brother Jacques and his father, each of whom allegedly lent $10,000. In addition, his brother Gilles allegedly lent him $5,000 later on.
[4] During this period, the Appellant met Sabrina Mansour. A native of Martinique, she settled in Canada in September 1998. They met in February 1997 while she was visiting Canada on vacation. She came back a second time in December 1997, which is when the Appellant allegedly told her about his beauty and tanning salon. He allegedly asked her for a loan so that he could make repairs. Before returning to her country, she allegedly advanced $4,000 to him.
[5] According to Ms. Mansour, the Appellant requested further advances, claiming that other work was needed. She allegedly gave him two sums of money in 1998, one in September and another in late December, totalling $7,000. The funds were remitted in cash and the Appellant signed no acknowledgment of debt.
[6] The Appellant and Ms. Mansour dated until late 1999, when they began to live together. They stayed together until July 2003, when their relationship ended.
[7] In 1999, Ms. Mansour's brother visited her and gave her $9,000 in cash for her birthday. She handed this money over to the Appellant. Later, in August 1999, she went to visit her parents and obtained another sum of cash - roughly $9,000 - which she brought back to Canada. Ms. Mansour said that she gave this money to the Appellant upon returning to Canada. He was complaining about needing money to pay for renovations. In 2000, Ms. Mansour allegedly gave him approximately $15,000. The Appellant signed no acknowledgements of debt with respect to any of these additional advances.
[8] Hoping to recover her money, Ms. Mansour played an active role in the Appellant's business starting in November 2000. She developed marketing strategies and really took charge of the activities. At the insistence of her mother, Ms. Mansour signed an agreement with the Appellant in 2001. It consisted of a partnership agreement, an assignment of financial interest, and a counter-letter dated September 24, 2001.
[9] According to Ms. Mansour, her mother was dissatisfied with the first agreement, so a second agreement was signed in which the Appellant acknowledged owing Ms. Mansour $25,000.
[10] This second agreement was tendered in evidence. It stipulates that it prevails over any prior or subsequent agreement. It is dated January 10, 2002, and essentially provides that Ms. Mansour will be entitled to 20% of net after-tax profits of the Centre de santé et beauté Venicia, that she will be entitled to 50% of the profits and will bear 50% of the losses of any new beauty and wellness centres in the province of Quebec, and that she and the Appellant will be equal owners of such centres. The agreement also stipulates that, on or about December 31, 2003, the Appellant will pay Ms. Mansour $25,000 for her participation in the development of the Centre de Santé et Beauté Venicia. In addition, it states that Ms. Mansour agrees to devote 40 hours of work per week to the beauty centre. Strangely, the last clause says that the first agreement remains valid except to the extent of any conflict between the two agreements.
[11] The audit in this matter began in late October 2001. Brigitte Mailloux represented the Appellant in his dealings with the Minister until June 2002, when she was replaced by Ms. Mansour. At a meeting with the auditor on June 18, 2002, Ms. Mansour told the auditor about the Appellant's debt to her, and said that she had no evidence of it, except what is stated in her copy of the second agreement. She gave the auditor a document dated August 29, 2002, which breaks down the $25,000 advanced to the Appellant as follows:
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1997
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$10,000
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1998
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$15,000
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1999
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$20,000
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2000
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$25,000
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[12] The document specifies that this breakdown is approximate and dates back more than five years. In her testimony, Ms. Mansour explained that it shows a $10,000 loan in 1997 and a $5,000 loan in each of the subsequent years, for a total of $25,000. As for the $25,000 stipulated in the second agreement, she said that the agreement was prepared by a friend of the Appellant's and was signed in a restaurant on the eve of her departure to her country. In her view, it was clear that the Appellant owed her $25,000, but, to settle her disputes with the Appellant, she signed the agreement even though she believed the Appellant owed her more. In her testimony, she also reiterated that the amounts stated in the document submitted to the auditor are approximate, and that she actually lent the Appellant $4,000 in 1997, $7,000 in 1998, $18,000 in 1999 and approximately $15,000 in 2000. She explained that she was able to be more accurate in her testimony because she obtained her family's help to determine the amounts lent. She added that she gave the Appellant more money than she is claiming from him.
[13] Since they stopped living together in July 2003, Ms. Mansour and the Appellant have tried, in vain, to settle their disputes. Through her lawyers, Ms. Mansour filed a motion to institute proceedings in the Court of Quebec on March 5, 2005, claiming sums of money and damages from the Appellant. Although the motion merely sets out allegations, it is interesting to see how the lawyers have circumscribed the issues. I therefore reproduce paragraphs 1 through 18:
[TRANSLATION]
1. The plaintiff and the defendant lived together from 1999 to 2003.
2. During this period, they operated a wellness centre together under the business name "Centre de santé et beauté Vénicia". In fact, the plaintiff worked there full-time from November 2000 until the couple broke up in December 2003.
3. During the year 2000, the plaintiff lent the defendant $25,000 for and on behalf of Centre Vénicia.
4. On September 24, 2001, the parties signed a partnership agreement, and an assignment of financial interest under which the plaintiff was the assignee of certain shares of Centre Vénicia, as shown by a copy of the said agreements, produced together as Exhibit P-1.
5. On the same date, however, the parties signed a counter-letter annulling the effects of the agreements in P-1, as shown by a copy of the said counter-letter, produced as Exhibit P-2.
6. Dissatisfied with the aforementioned agreements (P-1 and P-2), the plaintiff tried, during the fall of 2001, to negotiate a satisfactory agreement that reflected the amounts lent to Centre Vénicia and her contribution of time to the business.
7. On January 10, 2002, after many discussions and negotiating sessions, the parties signed an agreement governing their business relationship, as shown by a copy of the said agreement, produced as Exhibit P-3.
8. Under the terms of this agreement, the plaintiff was to receive 20% of the net after-tax profits of Centre Vénicia effective January 1, 2002.
9. Moreover, under the same agreement (P-3), the defendant was to pay the plaintiff $25,000 on or about December 31, 2003.
10. In December 2003, when the parties broke up, they agreed that the defendant would pay the plaintiff $50,000 in final settlement of the amounts due, both under agreement P-3 and under the loan made by the plaintiff.
11. So far, however, despite the plaintiff's numerous requests and the many negotiations between the parties, this sum of $50,000 still has not been paid to the plaintiff.
12. Specifically, on February 25, 2004, the plaintiff sent the defendant a notice of default demanding that he pay the sum of $50,000 before March 31, 2004, all of which is shown by a copy of the notice of default produced as Exhibit P-4.
13. In the wake of letter P-4, the parties began negotiations aimed at settling their past spousal and business relationship definitively.
14. Following discussions, the parties agreed that the plaintiff would receive the sum of $50,000 from the defendant, as shown by the three draft agreements, copies of which are produced together in support of this claim as Exhibit P-5.
15. From August to November 2004, negotiations and discussions between the parties continued through their respective attorneys.
16. In fact, on November 24, 2004, the defendant admitted through his attorney that he had received a $25,000 loan from the plaintiff, and acknowledged that he had agreed in the past to pay the plaintiff an additional $25,000, for a total of $50,000, all of which is shown in a letter dated November 24, 2004, produced in support of this claim as Exhibit P-6.
17. In this letter, the defendant claims to have paid $25,000 to the plaintiff (which is denied) but admits that the plaintiff is owed a balance of $25,000.
18. Despite this admission by the defendant, the plaintiff has still not been repaid this sum of $25,000 which she is owed.
[14] For his part, the Appellant filed a statement of defence and counterclaim. In the statement of defence, he denies most of the allegations, but admits to paragraph 9, and acknowledges that the payment of $50,000 which Ms. Mansour alleges at paragraph 10 of the motion was to settle all their business dealings, including the alleged $25,000 loan referred to in paragraph 3 of the motion, which was allegedly advanced in 2000.
[15] However, in her testimony, Ms. Mansour specified that she will have to ask her lawyers to amend her motion in order to correct the first three paragraphs, and added that she has sent them an e-mail in this regard. She stated that, contrary to what is alleged in paragraph 2, she did not operate the business jointly with the Appellant; that despite what is stated in paragraph 3, she lent $15,000, not $25,000, in 2000; and that, despite the wording of paragraph 1, she began to live with the Appellant only in late 1999, not from 1999 to 2003. Lastly, she explained that in the opinion of her lawyers, her claim against the Appellant for amounts lent prior to 2000 was time-barred.
[16] The Appellant acknowledges receiving sums of money totalling $25,000 from Ms. Mansour in 1998 and 1999. This money was used to pay for renovations and leasehold improvements, to install therapeutic baths, to fit out the reception area and to build the second floor. This work was done over a three-year period and ended in 2000 with the installation of the air conditioning.
[17] The Appellant's 1998 and 1999 income tax returns were tendered in evidence. They say nothing about the Appellant owing Ms. Mansour money. The 1999 return provides a complete list of his creditors and his debts, which total roughly $75,000, but there is no mention of any indebtedness to Ms. Mansour. The Appellant says that his tax returns comply with the Act and that the lack of reference to Ms. Mansour's claim is due to the fact that she is a Frenchwoman and does not hold Canadian citizenship.
[18] On November 7, 2001, the Appellant met with Stéphane Perreault, the Respondent's auditor. According to the Appellant, they discussed his loans and the fact that his girlfriend (Ms. Mansour) allegedly lent him money. The auditor denies this. The Appellant claims that they did not discuss the amount of the loan because the auditor did not ask him questions on the subject. In a letter from the Appellant to the auditor dated April 7, 2002, in which the Appellant describes his debts, there is no reference to this debt to Ms. Mansour. The Appellant says that he did not mention it because he knew that the auditor would not accept this expense, especially since his accountant and his brother commented that [TRANSLATION] "they will get into that" -"they" being the authorities - because Ms. Mansour is not Canadian.
[19] The Appellant testified that he gave Ms. Mansour 20% of the net after-tax profits of the business in 2003 and 2004, and that this is stated in his income tax returns for those years. He reiterated that he owes Ms. Mansour $50,000. With respect to the second agreement, he said that the document is not clear, but that he signed it as drafted to protect himself in some unspecified way because he was afraid of Ms. Mansour. He tried to settle with Ms. Mansour informally, but their differences degenerated into court proceedings.
[20] For his part, the auditor testified that he met with the Appellant three times: November 7, 2001, November 14, 2001, and April 10, 2002. At the first meeting, where they discussed the Appellant's debts, he made no reference to the debt to Ms. Mansour. They did not discuss debts at the second meeting, but, at the third one, the Appellant produced his letter dated April 7, 2002, which contains a description of his debts. The letter does not refer to Ms. Mansour's claim, however. In fact, it is only when the auditor met Ms. Mansour on June 18, 2002, that she spoke to him about the Appellant's debt to her. On August 30, 2002, she sent him a document, discussed at paragraph 11, containing a breakdown of the $25,000 loan over four years. The auditor refused to include this debt in the Appellant's liabilities because there was no supporting document. Ms. Mansour told him that the money came from her parents.
[21] The audit was undertaken because the Appellant's cost of living was inconsistent with his reported income, as his income tax return disclosed business losses since 1997. The auditor determined the Appellant's cost of living, took certain of his statements into account, and then established his income accordingly. Based on the audit, he determined that certain invoices had not been accounted for, and that $300 in monthly income from a hair salon that was being operated inside his establishment had not been reported. The Appellant was responsible for the till. The auditor therefore added $13,891 and $52,906, respectively, to the Appellant's reported income for each year in question.
[22] The Appellant is now asking that a $5,000 debt to Ms. Mansour from 1998, and a $20,000 debt to her from 1999, be subtracted from the additional income amounts imputed to him, and that the penalty for each year in question be set aside.
[23] The Appellant alleges that his wellness centre needed renovations and that, in view of his trouble obtaining credit, he needed money to pay for all the renovation work. He explained that he received money from relatives, and got $25,000 from Ms. Mansour in 1998 and 1999. The evidence discloses that expenses were indeed incurred to renovate the wellness centre, but the Appellant did not reveal how much it cost each year, or in total, to do the work. The Appellant submits that the funds supplied by Ms. Mansour served to pay these costs.
[24] However, the Appellant makes no reference to his alleged debts to Ms. Mansour in his 1998 and 1999 income tax returns. This is particularly striking in his 1999 return, where all his other creditors are listed. The Appellant had two meetings with the auditor where his debts were at issue, yet he never brought up the existence of the debt to Ms. Mansour. Moreover, in a letter to the auditor dated April 7, 2002, the Appellant summarized his financial obligations but did not mention the obligation to Ms. Mansour. While the Appellant claims to have discussed a loan from his girlfriend at the first meeting with the auditor, it is difficult to reconcile this claim with the Appellant's statement that he did not discuss this loan because Ms. Mansour was French and was not a Canadian citizen, and that his accountant and his brother suggested not talking to the authorities about the loan because they would [TRANSLATION] "get into it." It was clear, then, that there was an attempt to conceal something. Given this, why would he have mentioned the loan to the auditor? If the instructions were not to talk about it, then the auditor's version, namely that the debt to Ms. Mansour was not mentioned at this first meeting, is more plausible in my opinion.
[25] It is also very difficult to reconcile the Appellant's testimony with that of Ms. Mansour. The Appellant claims that he borrowed $5,000 in 1998 and $20,000 in 1999. For her part, Ms. Mansour claims that she lent the Appellant $7,000 in 1998 and $18,000 in 1999. To complicate matters, in August 2002, Ms. Mansour declared to the auditor, in writing, that she had lent the Appellant $5,000 in 1998 and a further $5,000 in 1999. The document refers to an amount of $25,000 and says that it was [TRANSLATION] "granted" to the Appellant. It also refers to an amount of $10,000 in 1997 and an amount of $5,000 in 2000. Ms. Mansour explained that this breakdown was approximate. Here, in brief, are the differences between Ms. Mansour's testimony and the document: In her testimony, Ms. Mansour referred to a loan of $4,000 in 1997, whereas the document refers to $10,000; for 1998, her testimony referred to $7,000, while the document refers to $5,000; for 1999, her testimony referred to $18,000, while the document refers to $5,000; and lastly, for 2000, she testified about a loan of approximately $15,000, while the document refers to $5,000. In my humble opinion, the differences between the document and the testimony are significant. Ms. Mansour had from June 19 to August 29, 2002, to prepare the document - a period which, it might be noted, is much closer to the events than her testimony in Court. In fact, Ms. Mansour relied more on her parents' memory than her own in establishing the amounts and preparing her testimony before this Court.
[26] In addition to all these contradictions, there is the agreement of January 10, 2002, between the Appellant and Ms. Mansour, which, according to Ms. Mansour, was repeated in order to obtain an acknowledgment of debt from the Appellant. However, the agreement in question makes no reference to the existence of any debt. Rather, it sets out an undertaking by the Appellant to pay Ms. Mansour the sum of $25,000 for her participation in the development of the wellness centre. In my view, this is a partnership in which each person's contribution was redefined, much like future profit-sharing and Ms. Mansour's contribution of time. The Appellant says that he signed the document because he was afraid of Ms. Mansour for some unknown reason. Ms. Mansour would have been content with a $25,000 settlement even though her claim was greater.
[27] Lastly, there is Ms. Mansour's motion. In the motion, she claims the $25,000 contemplated in the agreement of January 10, 2002, alleging that she lent the Appellant $25,000 in 2000. However, according to her testimony, the amount of the 2000 loan was approximately $15,000. According to the letter to the auditor, the 2000 loan was $5,000, and now there is a court claim for a $25,000 loan made in 2000. Ms. Mansour said that her demand would have to be amended to correct this error, and submits that she cannot claim the loans made in previous years because they are time-barred. It seems that Ms. Mansour has an answer to every question, but she appeared much too intelligent to be entangled in so many contradictions.
[28] For his part, the Appellant testified that he owed Ms. Mansour $56,000, but in his statement of defence, he acknowledged owing her $50,000, consisting of the $25,000 contemplated by the agreement and the $25,000 loan advanced in 2002. He agrees that, as alleged in the motion, there have been a total of $8,771.54 in partial reimbursements of this debt, which leaves a balance of $44,228.46.
[29] Clearly, by their actions, contradictions and distortions of the truth, the Appellant and Ms. Mansour have succeeded in endangering their credibility to the point that it is now impossible for me to lend credibility to their statements. Did Ms. Mansour actually lend money to the Appellant in 1998 and 1999, do these amounts represent her contribution to or participation in the wellness centre in the expectation of a potential partnership with the Appellant or an opportunity to establish herself professionally as an esthetician, or did the parties have other motivations? Regardless of the reason, based on the evidence heard, it is impossible, in my view, to establish the actual amount that Ms. Mansour granted, lent or invested in the wellness centre in 1998 and 1999, Thus, the Appellant has not established, on a balance of probabilities, that there existed, in 1998 and 1999, a liability that the auditor should have taken into consideration in calculating the Appellant's net worth for the two years in question.
[30] The Respondent imposed penalties under of subsection 163(2) of the Act. The onus is therefore on the Respondent to show that the Appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in his income tax returns for the two years in question. On the issue of gross negligence, in Venne v. Canada, 84 DTC 6247, [1984] F.C.J. No. 314 (QL), Strayer J. stated:
. . . "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. . . .
[31] Couture C.J.T.C., as he then was, stated as follows in Morin v. M.N.R., 88 DTC 1592, at pages 1593-94:
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 . . .
[32] In the case at bar, there is no doubt that the Appellant's bookkeeping was negligible. His income statement was based on the debit and credit card transaction records that he gave his accountant brother to prepare. The evidence also disclosed that the Appellant failed to report $300 a month in rental income. While an assessment using the net worth method is fraught with many inaccuracies and uncertainties, the fact remains that it discloses a substantial discrepancy of $13,891 in 1998 and $52,906 in 1999 in the case at bar. Based on the 1998 and 1999 income tax returns, the Appellant did not have enough income to live on, and he was unable to explain this state of affairs. This discrepancy clearly shows that the Appellant did not report all his income.
[33] Through his lawyer, the Appellant submits that his lack of business experience accounts for this discrepancy and this omission to report all his income. In addition, he left the accounting to his brother. In my opinion, this is a plausible explanation of the fact that the Appellant did not report all his income, except that it is his responsibility to do so, and he cannot escape it based on excuses of this kind. In my opinion, the Appellant cared little whether the bookkeeping was adequate and whether he was filling out his income tax returns correctly for the years in question, and, consequently, I find that he was indifferent as to whether he complied with the Act, or that he knowingly made an omission in his income tax returns. Based on the evidence adduced, I conclude that the Appellant's attitude reflects this indifference as to his tax obligations.
[34] In the case at bar, I am satisfied, on a balance of probabilities, that the Respondent was justified in imposing penalties for the years in question. The appeals are therefore dismissed.
Signed at Ottawa, Canada, this 30th day of August 2005.
Angers J.
Translation certified true
on this 30th day of November 2006.
Monica F. Chamberlain, Reviser
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