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Citation: 2004TCC47
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Dockets: 2003-796(IT)I
2003-798(GST)I
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BETWEEN:
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YVETTE MARCHILDON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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AND
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Dockets: 2003-803(IT)I
2003-804(GST)I
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BETWEEN:
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NANCY MARCHILDON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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AND
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Dockets: 2003-793(IT)I
2003-794(GST)I
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BETWEEN:
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LOUIS MARCHILDON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Rip, J.
[1] Yvette
Marchildon, Nancy Marchildon and Louis Marchildon are filing appeals from tax
assessments on income for the 1996 and 1997 taxation years and from
excise tax assessment ("goods and services tax" or "GST")
for the period from January 1, 1996 to December 31, 1998.
[2] The
three appellants object to inclusion of amounts as undeclared income and
contest the assessment of penalties under subsection 163(2) of the Income
Tax Act ("ITA") for the 1996 and 1997 taxation years.
Yvette Marchildon is also claiming for the 1998 taxation year.
[3] The
Appellants also object to the assessment by the Minister of National Revenue
("Minister") of GST that was not remitted as well as the assessment
of penalties under section 285 of the Excise Tax Act ("ETA").
[4] The appeals were
heard on common evidence.
[5] In making his
reassessment, the Minister relied on the following facts:
(a) The Appellants
operated a restaurant;
(b)
The restaurant was
operated and jointly owned in equal parts by Louis, Yvette and
Nancy Marchildon during 1996 and 1997; Yvette Marchildon
operated the restaurant as sole proprietor during 1998;
(c)
Video poker machines
were operated on the premises for the profit of the Appellants Louis and Nancy
Marchildon during 1996 and 1997 and for the profit of the Appellant
Yvette Marchildon during 1998;
(d) The video poker
machines were the property of Grand Prix Amusement Ltd. (hereinafter "the
Supplier");
(e) The Appellants did
not declare the income pertaining to the video poker machines for the years or
the periods when they owned the restaurant;
(f) The Ontario
Provincial Police conducted a search of the Supplier's property on
February 24, 1998;
(g) The Supplier's books
were found during the search;
(h) Income from the
video poker machines was registered in the Supplier's books;
(i) The Appellants
neglected to declare income from the video poker machines for the years that
they owned the restaurant;
(j) The Appellants or
the person preparing the income tax returns for the years in which the
Appellants owned the restaurant, the Appellants made a misrepresentation that is
attributable to neglect, carelessness or wilful default; and
(k) The Appellants knew
or ought to have known that in making false declarations or misrepresentations
of the facts, the tax payable would be less than it would have been had the
false declarations or misrepresentations of the facts not been made.
[6] In making his
reassessment of the excise tax in the files, the Minister also relied on the
following facts:
(a) Yvette Marchildon
operated the restaurant as sole proprietor for the 1998 taxation year;
(b) The Appellants
declared no GST pertaining to their shares of the video poker machines;
(c) The GST amounts
attributable to the video poker machines were found in the Supplier's books;
and
(d) The Appellants
neglected to declare the GST on all taxable supplies.
The Appellants' Position
[7] The Appellants
maintain that the amount of undeclared income from the video poker machines is
much too high. At the most, the Appellants estimate that the machines generated
a total income of from $20,000 to $22,000 for the 1996 and 1997
taxation years. Beyond these amounts, the machines were used only for
entertainment and did not involve an actual business transaction.
[8] The Appellants also
maintain that the taxable supplies were inadvertently not taxed and were in the
order of $3,000 and not $9,030.65. The GST on these taxable supplies should be
calculated on this amount.
[9] Furthermore, they
state that interest should not be assessed or should be assessed on a lesser
amount on the basis of the previous paragraph. The Appellants add that the
penalties should not be assessed because they were unaware that certain
supplies were not taxed. Their agent, Gilles Gratton, admits that they
were negligent, but not grossly negligent.
The Respondent's Position
[10] In contrast, the
Respondent alleges that the Appellants neglected to declare the income from the
video poker machines.
[11] The Appellants
neglected to pay GST on certain taxable supplies due to errors in the cash
register reports, as was the case for the income from the video poker machines.
The Appellants admitted that the amount of $3,000 in restaurant sales was
taxable and consequently that GST was owed. Counsel for the Minister agrees
with this amount.
[12] The Minister agrees
that the amount of GST pertaining to income from the video poker machines will
depend on my findings with regard to the undeclared income.
[13] The Respondent
states that the Appellants were grossly negligent such that penalties are
necessary. However, the Respondent acknowledges that there is no gross
negligence with regard to the unpaid GST amounts related to errors in the cash
register reports and, as a result, the penalties under section 285 of the ITA
will not be assessed on these amounts. Moreover, the basic interest and
penalties are owed on the full amounts at issue.
Testimony of Nancy and Louis Marchildon
[14] The Appellants Nancy
Marchildon and Louis Marchildon testified during the hearing. The Appellant
Yvette Marchildon did not testify although she was present at the hearing.
[15] This was Nancy Marchildon's first
experience keeping books. In
order to do this, she relied on the cash register reports. Some supplies were
not taxed by the cash register such as the daily specials. Nancy Marchildon
stated that at the time, she did not know that these supplies were not being
taxed. She said she knew that the GST is a 7% tax but did not know that
the cash register reports should coincide with 7% taxation.
Nancy Marchildon admitted that the Appellants owed about $3,000, contrary
to the $9,030.65 claimed by the Respondent.
[16] The Appellant
testified to the effect that she, Louis Marchildon and
Yvette Marchildon knew that the operation of video poker machines was illegal
in Ontario because of the bets
that were involved in using these machines. She also testified that she and
Louis Marchildon regularly played the video poker machines. They would open the
machines with the keys that had been left for their use and play using the
monies found in the machines or they would increase the credits from the inside
and play until the credits were used up. Nancy Marchildon explained that the
Supplier had noted that the amounts found in the video poker machines did not
match the readings of the machines. She felt that the Supplier had seemed to be
displeased with these inconsistencies.
[17] According to
Nancy Marchildon, the income from the video poker machines was separate
from the income from the restaurant that the Appellants operated. The profits
from the video poker machines stayed in the machines. The Appellants allegedly
did not declare receipts from the video poker machines because they were too
low. However, the Appellant revealed that she declared income as low as $10 to
$20 for a period of eight months for the peanut-vending machines located in the
restaurant. She said that if the income from the video poker machines had been
higher, it would have been impossible to hide these amounts and they would have
had to declare them. Finally, Nancy Marchildon stated that she consulted with
their accountant to find out if she had to declare the amounts from the video
poker machines. The accountant had told her no. Nancy Marchildon remitted no
records pertaining to the video poker machines to the accountant since she had
kept no records.
[18] Louis Marchildon testified that he
played about three hours in the evening and a few hours during the night on a
daily basis. He admitted that it is possible he played for an amount equivalent
to $40,000 to $50,000.
[19] Louis Marchildon explained that the
receipts from the video poker machines were shared as follows: one week out of
five, the Appellants kept all the profits and the other four weeks, the profits
were divided between the Appellants and the Supplier of the video poker
machines. According to Louis Marchildon, this was not income but in fact gifts
from the Supplier to them. When Louis Marchildon was questioned about the
nature of the fractions (60/40 and 1/5) handwritten on the contract
binding the Appellants and the Supplier of the video poker machines, he stated
that he could not explain these fractions.
[20] Louis Marchildon
estimated the amount of the Appellants' weekly profit at $200. He
acknowledged then that the Appellants owe the amount of $20,000 to $22,000. The
Appellants used these amounts to pay minor expenses such as gas for the car.
Testimony of Éric
D'Amour
[21] The Minister called
one witness only, Éric d'Amour,
the investigator from the Canada Customs and Revenue Agency. Mr. D'Amour was
the investigator for the Appellants' files. He filed as Exhibit I-2 the
working sheets he used during his audit. He testified to the effect that his
findings were based on the reconciliation records provided by the Ontario Provincial
Police. The Ontario Provincial Police allegedly obtained these documents during
the search of the Supplier's property in February 1998. The reconciliation
records indicated the income from the video poker machines that was
attributable to the merchants and to the Supplier. These records were created
using the routing sheets found in the video poker machines' counters. The
amount indicated under "money in" was the income generated by the
video poker machine. This was the difference between the money coming in and
the money going out as a result of wins. These routing sheets were the only
means the Supplier had of knowing the amounts the machines should contain, as
the merchants had access to the video poker machines.
[22] As well, Mr. D'Amour stated that the abbreviations VS and NS meant [translation] "yours" and [translation] "ours".
"Yours" was the merchant's share, while "ours" was the
Supplier's.
[23] Finally, Mr. D'Amour
explained that pursuant to his observations, he interviewed the Appellants.
This interview confirmed that the income from the video poker machines had not
been declared. Consequently, considering the significance of the undeclared
amounts, Mr. D'Amour, recommended that an additional penalty be assessed.
According to Mr. D'Amour, the Appellants were fully aware of their failure to
declare the video poker machine income and thus, they acted voluntarily.
[24] The questions at
issue are:
(a) Are the receipts from the video poker
machines income for the Appellants and receipts from the sale of taxable
supplies?
(b) If so, should the penalties under
subsection 163(2) of the ITA and section 285 of the ETA be
assessed with regard to the receipts from video poker machines?
Receipts from video poker machines
[25] The Appellants acknowledge
that they have taken the equivalent of $20,000 to $22,000 from the video poker
machines to subsidize their needs. Beyond these amounts, they state that there
were no an actual business transactions, as it was only entertainment.
[26] Related to video
poker machines, a business transaction occurs when an individual inserts a coin
in the machine and, in exchange, receives a virtual poker game with the chance
of winning or losing. In the case at bar, the Appellants inserted coins already
in the machines or ran up the credits on the video poker machines and would
play. The fact that they had the keys giving access to the machines leads the
Appellants to believe that there was no business transaction. However, no
evidence has been presented explaining why the Appellants had these keys. We
only have the testimony of Appellants Louis and Nancy Marchildon who, let us
admit, were not very credible. The keys may have been given to them so they
could have access to their share of the profits or in the event of mechanical
failure. If the Supplier was inclined to allow the Appellants to play for free,
why was he unhappy with the fact that the figures did not match the amounts
found in the machines? No evidence was brought to this effect by the
Appellants. It seems more probable to me that the keys were access to the
machines and not access to unlimited play.
[27] The Appellants had
to show by the preponderance of evidence that the receipts from the video poker
machines were not income for them or that the Minister erred in the calculation
of these receipts. The Appellants have not discharged the burden of proof. The
counters allow receipts taken from the video poker machines to be determined
for the years at issue, while the fractions (60/40 and 1/5) allow the portion
of these receipts attributable to the Appellants to be calculated. One week in
five, the Appellants kept all of the profits, while the other four weeks, they
kept 60% of the profits. In the absence of evidence that the Appellants were
permitted to play the video poker machines without paying, it is fair to deem
that the readings of the video poker machines' counters correctly depict the
income taken from these machines. The Appellants benefited from these profits,
partly in cash and partly in playing time. The fact that the Appellants chose
to gamble their profits does not change the fact that they benefited from this
income.
[28] In Huot v. Canada,
[2000] T.C.J. No. 164 there was also a question of determining
whether certain amounts coming from video poker machines were correctly added
to the income of the Appellant, Huot. The undeclared incomes had been set using
the accounting books obtained from the video poker machines' owner. The
Appellant objected to these books being used to determine the amount of taxable
income. According to him, this was not tangible proof of the counter as, for
example the readings provided by the video poker machines themselves would have
been. Lamarre-Proulx J. concluded as follows, at paragraph 31:
The allegations made by the respondent in the
Reply to the Notice of Appeal have been fully proven
by the witnesses who were officers of the Minister, and their testimony was
corroborated by the witnesses who were employees of Wiltron. The witnesses were
not present during each other's testimony. The appellant was aware of the
evidence the respondent was going to adduce, and yet he produced no contrary
evidence. For example, he did not ask either Jacques Gosselin or
Ronald Miron any questions about the approximate amount of the income from
the machines at his convenience store. Mr. Miron, who was the regular
collector for the appellant's store for several years, could have recalled the
approximate average monthly income amount, but the appellant did not ask him
any questions. One can only think that the suggested figure of $117 a month is
unreasonable. It is hardly plausible that a business leasing video poker
machines would set up an entire leasing and collection system, involving a
number of employees, for the meagre income suggested by the appellant.
[29] In the case at bar,
not only did the Respondent rely on tangible proof from the counter but the
Appellants, just as in Huot, were unable to bring proof refuting the
figures taken from the counters or explaining the fractions (60/40
and 1/5) added to the contract between the Appellants and the Supplier.
[30] I agree with Counsel
for the Respondent. The receipts from the video poker machines are the amounts
that the players of these machines paid to play poker. In addition to being
undeclared income, these receipts are undeclared taxable supplies.
Penalties
[31] Subsection 163(2)
of the ITA and section 285 of the ETA provide that a taxpayer who
knowingly, or under circumstances amounting to gross negligence, has made or
has participated in, assented to or acquiesced in the make of a false statement
or omission in a return, claim, form, etc., is liable to a penalty. The burden
of proof with regard to the penalties rests on the Respondent.
[32] Did the Appellants
act knowingly or under circumstances equivalent to gross negligence?
[33] The Appellants knew
that the machines or at least the betting was illegal. Nancy Marchildon
testified that if the amounts had been more significant, she would have had to
declare them, otherwise, it would have been impossible for them to use these
monies. However, the Appellants declared the income from the peanut vending
machines that was about $20 over eight months but did not declare an
amount of $200 per week. Nancy Marchildon stated that she asked the
accountant if she had to include these amounts. This shows at the minimum that
she doubted that the amounts were taxable and this gesture in itself does not
make the Appellants' behaviour excusable. Finally, believing that the amounts
left by the Supplier were not income but, in fact, gifts is certainly behaviour
that can be likened to gross negligence. A reasonable individual operating a
business would have known that this was not a gift and if this were the case, a
reasonable person would have asked for written proof. The Appellants brought no
evidence explaining these so-called gifts. It is more likely that this is a
share of the profits and not mere gifts.
[34] From all the facts,
only the questioning of the accountant could have helped the Appellants.
However, no records were remitted to the accountant, because there were no such
documents. Did the Appellants provide all the information necessary for the
accountant to be able to give an informed opinion? This question remains unanswered.
The Appellants brought no evidence besides Nancy Marchildon's testimony to
support the statement that they consulted their accountant. At the very most,
if the Appellants consulted their accountant, this is a case of wilful
blindness amounting to gross negligence. Marceau J. in Cloutier v. The
Queen, [1978] F.C.J. No. 917
explains at
paragraph 10:
The question before the Court is whether
the circumstances in which the omission occurred are such that gross negligence
may be attributed to the taxpayer: "gross negligence" being taken to
mean a relatively serious act of negligence, which is difficult to explain and
socially inadmissible.
[35] It is difficult to
explain how three individuals could have sincerely believed that the money they
took from the video poker machines was not income for them. In 410812
Ontario Ltd. v. Canada, [2002] T.C.J. No. 176, Bowman J. is of
the opinion that if it is possible that the taxpayer wrongly trusted his
accountant and that the assumption is plausible, the Court must give him the
benefit of the doubt:
Reverting to the case of the penalty
imposed under section 285 against the appellant there is much merit in
Mr. Brown's position that Mr. Crittenden knew or ought to have known
that GST was payable on the third party payments and that failure to declare
GST was grossly negligent. That hypothesis is reasonable and viable but the
evidence is equally consistent with another viable and reasonable hypothesis,
that Mr. Crittenden relied - perhaps wrong-headedly or negligently - on
his accountant's opinion that no GST was payable or perhaps he formed an
erroneous view of the law. I think Mr. Crittenden was negligent but the
evidence is consistent with an hypothesis that does not entail gross negligence
as described in the cases cited at the beginning of these reasons. Accordingly
the appellant is entitled to the benefit of the doubt.
[36] But in these
appeals, there is no suggestion that the accountant was part of this serious
negligence. The Appellants declared the income from the peanut vending
machines, as low as $20 over eight months. It is thus difficult to support the
contention that the Appellants believed they did not have to declare the income
acknowledged to be $200 per week from the video poker machines and pay, by the
same token, the GST on these taxable supplies. Finally, the Appellants'
situation is very different from that of Lucien Venne in Venne v. Canada, in which the Court refused penalties
because the taxpayer trusted his accountant:
. . . The taxpayer here is a
man with a grade five education, working and paying taxes in a language which
is not his first language nor that in which he was educated, a man who is more
at ease in a garage than in an office. Not only do these factors militate
against a finding that the misstatements in his returns were made knowingly by
him, but also his entire course of conduct is not consistent with that of a
person who had deliberately set out to conceal large amounts of taxable
income. He kept what appear to be quite complete records of sales in his
business, then turned these over to his bookkeeper. As far as one can
judge from the evidence, all or most of the revenues from the business were
deposited in the bank where the monies could readily be traced. He also
lodged all but one or two of the mortgages on which he lent money with banks
and trust companies which kept careful records of the income earned from these
"escrow mortgages". It is unlikely that a person planning to
conceal income would have handled his affairs in this
manner. Further it is hard to believe that he was consciously and
effectively supervising his bookkeepers since a number of the errors made in
his returns were to his disadvantage, even though more or them were to his
advantage. I am therefore not able to conclude that the misstatements in
the returns were made "knowingly" by the plaintiff.
[37] With regard to
Appellant Yvette Marchildon, she did not testify although she was present
at the hearing. I do not know what her duties or responsibilities are at the
restaurant. She heard Mr. D'amour's testimony but did not attempt to offer
a reply. Thus, I must conclude that her testimony would not help me.
Ruling
[38] The undeclared
taxable supplies for the restaurant, or the sale of food and meals, are set at
the amount of $3,000 in view of admission on the part of the Appellants.
Counsel for the Minister agrees with this amount.
[39] With regard to the
inclusion and taxation of the amounts taken from the video poker machines, it
is fair to conclude that the Appellants did not discharge their burden of
proof. They were unable to prove that the receipts from the video poker
machines were not income and taxable supplies or that the income and taxable
supplies were a lesser amount than that set by the Respondent. The amounts
taken from the video poker machines are thus taxable as income under the ITA and as supplies for the purpose of the ETA. Therefore, the
appeals in this regard should be dismissed.
[40] I also find that all
the Appellants made a misrepresentation that was attributable to neglect, carelessness
or wilful default or committed fraud in preparing their returns under the ITA as well as for
the purpose of the ETA. The penalties imposed by both Acts with regard
to income and taxable supplies from the video poker machines are proper and
correct.
[41] Therefore, the
Appellants' appeals are allowed but only so that the Minister may reassess,
reducing the amount of taxable supplies of food and restaurant meals from
$9,030.65 to $3,000 and so that the Minister may reduce the penalties under
section 285 of the ETA with regard to this amount; the penalties
and income regarding the ITA, if applicable, will be subsequently
reduced.
Signed at Ottawa, this 16th day of
January 2004.
Rip, J.
Translation
certified true
on
this 26th day of April 2004.
Sharon Moren, Translator
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