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Citation: 2004TCC318
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Date: 20040430
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Docket: 2001-3094(IT)G
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BETWEEN:
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BUOR LEANG,
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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
Tardif J.
[1] This is an appeal concerning the
1996, 1997 and 1998 taxation years. The assessments were
subject to penalties in accordance with subsection 163(2) of
the Income Tax Act ("Act"). The assessments
under appeal were calculated using the net worth method.
[2] The appeal raises two questions.
The first is determining whether the Appellant declared his total
income and the second pertains to the merit of the penalties
assessed under subsection 163(2) of the Act.
[3] The Appellant's Notice of
Appeal reads:
[TRANSLATION]
1. During the
years at issue, the Appellant operated a restaurant under the
company name Les Délices d'Angkor Enr.;
2. Through
income tax assessments dated May 12, 2000, for the
1996, 1997 and 1998 taxation years, the income declared for by
the Appellant for the 1996, 1997 and 1998 taxation years was
increased by $41,288, $26,213 and $62,344 respectively for
additional income. In addition, penalties under
subsection 163(2) of the Income Tax Act were
assessed;
3. In making
these assessments, the Canada Customs and Revenue Agency auditor
used the net worth method;
4. During the
years at issue, Mr. Pho Leang and his wife as well as
Mr. Kim Leang, brothers of the Appellant, lived in the
Appellant's home;
5. For each of
the years at issue, Mr. Pho Leang gave the Appellant
amounts totalling $3,600 to help with household expenses and to
help support their mother who also lived in the Appellant's
home;
6. For each of
the years at issue, Mr. Kim Leang gave the Appellant
amounts totalling $5,000 to help with household expenses and to
help support their mother who also lived in the Appellant's
home;
7. In
establishing the additional income for each of the taxation years
at issue, the Canada Customs and Revenue Agency did not take into
account said amounts given to the Appellant by his brothers,
Pho Leang and Kim Leang;
8. In order to
help his brother, Kim Leang underwrote capital stock shares
of Délices de Thaïlande Inc., the Appellant loaned
this brother $5,000;
9. The $5,000
loan was repaid to the Appellant with a payment of $2,000 in
July 1996 as well as a payment of $3,000 in
January 1997;
10. In establishing the
additional income for the 1996 and 1997 taxation years, the
Canada Customs and Revenue Agency did not take into account said
loan nor its repayment;
11. During 1996, 1997 and
1998, Mr. Tho Leang, brother of the Appellant, gave
amounts totalling $5,000, $6,000 and $7,000 respectively to the
Appellant to help with expenses to support their mother as well
as Pathraporn Chalearmkiet, the Appellant's and
Tho Leang's niece, who lived in the Appellant's
home;
12. In establishing the
additional income for the years at issue, the Canada Customs and
Revenue Agency did not take into account the said amounts given
by Tho Leang to the Appellant;
13. Prior to 1996, the
Appellant loaned $10,000 to his brother Tho Leang for the
construction of his home;
14. Said $10,000 load was
repaid to the Appellant with a payment of $5,000 in 1996 as well
as a payment of $5,000 in 1998;
15. In establishing
additional income for the years 1996 and 1998, the Canada Customs
and Revenue Agency did not take into account said loan nor its
repayment;
16. In 1997, during a trip
to Thailand, Ms. Wandee Wesarachanon gave the Appellant
as well as Ms. Pathraporn Chalearmkiet sums totalling
$20,000 in order to pay for a portion of the living and
educational expenses of Ms. Pathraporn Chalearmkiet,
her niece, who had come to Canada to study;
17. In establishing the
additional income for the years 1997 and 1998, the Canada Customs
and Revenue Agency did not take into account said sums from
Ms. Wandee Wesarachanon;
18. In 1997, during a trip
to Thailand, the Appellant's parent gave him $5,000 as a
gift, which was deposited in his account in the National Bank of
Canada during 1998;
19. In establishing the
additional income for the years 1997 and 1998, the Canada Customs
and Revenue Agency did not take into account said sum of
$5,000;
20. Through his net worth
for 1996, 1997 and 1998, the Canada Customs and Revenue Agency
established the Appellant's personal expenses at $39,866.08,
$54,811.45 and $47,228.26;
21. The Appellant's
personal expenses for the 1996, 1997 and 1998 taxation years
amounted to $30,021, $40,190 and $32,581 respectively;
22. The Appellant duly
objected to the assessments for the 1996, 1997 and 1998 taxation
years and on June 20, 2001, the Canada Customs and
Revenue Agency issued new assessments reducing the additional
income to $31,489 for 1996, $16,937 for 1997 and $51,740 for
1998;
23. The Appellant is
relying, inter alia, on sections 3 and 163(2) of the
Income Tax Act, as applicable for the taxation years at
issue;
24. The Appellant argued
that over the course of the taxation years at issue, he had
received no income other than that duly declared in his tax
returns, with the result that Customs and Revenue Canada was not
justified in including any sums as additional income;
25. The Appellant argued
that he did not, knowingly or in circumstances amounting to gross
negligence, file a false statement or make an omission in his
income tax returns for the 1996, 1997, and 1998 returns and that
consequently, the assessment of penalties under
subsection 162(2) of the Income Tax Act was
unjustified;
26. The Appellant argues
that the assessments were improper in fact and in law;
[4] In reply to the Notice of Appeal,
the Respondent admitted paragraphs 1, 2, 3, 20 and 22; he
denied paragraphs 4 to 19, 21, 24 to 26 and added the
following paragraphs:
[TRANSLATION]
18. He takes note of the
statutory provisions in paragraph 23 of the Notice of
Appeal.
. . .
20. During the taxation
years at issue, the Appellant declared the following total
income:
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Taxation years
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Income
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1996
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$11,005
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1997
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$10,360
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1998
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$20,732
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21. By Notice of
Reassessment dated May 12, 2000, the Minister of
National Revenue set the tax to be paid by the Appellant for the
taxation years at issue. In order to do this, he added the
following undeclared business income and assessed a penalty under
subsection 163(2) of the Income Tax Act for each of
the years:
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Taxation years
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Undeclared income
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1996
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$41,288
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1997
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$26,213
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1998
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$62,344
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22. By Notice of Objection
dated July 17, 2000, the Appellant objected to the
reassessment for the 1996, 1997 and 1998 taxation years.
23. By Notice of
Reassessment dated June 20, 2001, the Minister of
National Revenue reduced the Appellant's undeclared business
income by $9,800 in 1996, $9,276 in 1997 and $10,604 in 1998 and
with regard to the difference, confirmed the reassessments that
had been issued on May 12, 2000.
24. In making the
reassessments for the 1996, 1997 and 1998 taxation years, the
Minister of National Revenue assumed, inter alia, the
following:
(a) during the taxation years at issue, the Appellant
operated a restaurant under the business name "Les
Délices d'Angkor Enr.";
(b) when he filed his income tax returns for the 1996,
1997 and 1998 taxation years, the Appellant declared the
following business income:
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Taxation year
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Gross business income
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Net business income
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1996
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$183,936
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$8,505
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1997
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$186,286
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$7,859
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1998
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$237,493
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$11,582
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(c) when the Appellant filed his income tax returns for
the 1996, 1997 and 1998 taxation years, he did not declare his
entire income;
(d) following a net worth audit and an analysis at the
time of the objection, the Minister observed respective
discrepancies of $31,489 (1996), $16,937 (1997) and $51,740
(1998) with regard to the Appellant's capital reconciliation
(a copy of the balance sheet and capital reconciliations
prepared during the audit and a summary of the adjustments
prepared at the time of the objections by the Minister's
employees is attached to this Reply to the Notice of Appeal as
Exhibits I-1 and I-2 respectively and are an integral part
thereof);
(e) the sums $31,489 (1996), $16,937 (1997) and $51,740
(1998) are income that the Appellant failed to declare and must
be taken into consideration for the purpose of computing his
income taxes for these same taxation years;
(f) the Appellant knowingly or in circumstances
amounting to gross negligence, made a false statement or omission
on his income tax returns filed for the years 1996, 1997 and
1998.
[5] The Appellant explained that he
lived with his family in a large house with a number of bedrooms.
During the years in question, there were a number of individuals
living there: the Appellant, his mother, his wife, their two
children, his two brothers and the wife of one of them, and a
niece.
[6] His mother was seriously ill. He
and his wife both worked in the restaurant he owned located very
near the family home. Most of the time, he and his wife ate at
the restaurant.
[7] Being unable to read or write
French, he explained that more often than not, he had to turn to
the individual who did the accounting to write the cheques he
signed. He and his wife are very involved in operating his
restaurant and they devoted six and often seven days a week
to it.
[8] The Appellant was head of this
family. He provided a home for his mother whose health had
seriously deteriorated and who needed care and constant
attention. He also provided a home for his brothers and one
brother's wife. Later, a niece came to live in his home.
[9] To contribute to the expenses made
for their mother and for room and board, one of his brothers was
paying him $350 cash per month, or $4,200 per year, during the
three years at issue. His other brother was paying him
approximately $400 per month.
[10] Both brothers came to confirm the fact
that they had indeed paid the Appellant the sums in question for
their lodging and as a contribution to the significant expenses
arising from their mother's state of health. Their mother had
special needs, such as an electric bed.
[11] In general, the testimony was
consistent with the content of the Notice of Appeal.
[12] In order to justify recourse to the net
worth method, Auditor Richard Guillet explained that
the business's internal controls were weak. When he was asked
how he had arrived at this conclusion, he explained that the
Appellant occupied a dominant role in his business and that he
assumed strategic duties, inter alia, looking after the
cash register.
[13] He also noted that the billing system
was very odd in that they were bills that bore only a number.
Thus, the bills could be reused.
[14] On that basis, he did not think it was
necessary to audit inventory or purchases; he performed an
analysis by sampling the cash register tapes, which balanced.
After a quick overview, he stated that he noticed nothing that
was irregular or abnormal.
[15] Since he was of the opinion that the
internal control was unreliable, he decided to proceed using the
net worth method. In order to do this, he questioned the
Appellant and gave him a form that he had to complete in order to
establish his net worth.
[16] The auditor acknowledged that he
received answers to all his questions in a cooperative
atmosphere. Generally speaking, he obtained everything he asked
for. In support of his claims regarding the sums received from
the members of his family and Pathraporn Chalearmkiet's
grandmother, the Appellant obtained various confirmations in
writing from the individuals involved.
[17] Because these were significant sums
paid or received, usually in cash, the auditor decided that there
was nothing conclusive in the absence of written evidence, such
as a deposit, official receipt, a cheque, etc. He basically
indicated that he was not a judge and did not have the power to
assess the truthfulness of the explanations or justifications
that were given to him.
[18] As this file developed, certain
information was changed or corrected. These changes, according to
the Respondent's representatives, were flagrant
contradictions and demonstrated as well that they could be false
representations.
[19] The outcome of this appeal rests
basically on the credibility of the evidence. Assessing the
credibility of testimony is not an easy task; I am continuously
looking for a reliable recipe for doing so.
[20] There are components that often allow
satisfactory conclusions to be drawn. I refer, inter alia,
to witnesses who have a selective memory or who have no memory at
all, who avoid answering questions, who act as if they do not
understand anything, those who repeatedly contradict themselves
or other testimony submitted to support a file, I refer to the
absence of witnesses, to wild and smart-alecky explanations, etc.
In short, it is easier in some situations than in others to reach
a conclusion regarding the quality of evidence.
[21] When presenting his argument, the
Respondent referred Léo Ducharme's,
"Pièces de la preuve" and specifically to
paragraphs 508, 509, 510 and 511, which read:
[TRANSLATION]
508. Section 2845 of the C.C.Q.
simply says that the probative force of testimony per se is left
to the appraisal of the court. This article says nothing
about the fact that appraising testimony is first and foremost up
to the trial judge to whom the trial of the cause comes. Having
the benefit of seeing and hearing the witnesses, he is thus in a
better position to judge the value that should be accorded to
their statements.
509. When it is a matter of assessing
the validity of testimony, the factors governing the
witnesses' credibility are what is important, in particular,
the following factors: the witness's means of knowledge, his
observation skills, his reasons for remembering, his experience,
how good his memory is and his independence with regard to the
parties in dispute. It falls to the person summoning a witness to
demonstrate the factors that favour his credibility, and to the
opposing party to bring unfavourable factors to light. These
unfavourable factors could pertain to such things as the
witness's morality. Therefore, in a particular case, a court
accepted a witness's propensity for getting out of his tax
obligations as a factor unfavourable to the witness's
credibility.664
510. We stress, however, that
testimony that the judge considers false on one point must not
necessarily be entirely dismissed.665 However, if a
witness contradicts himself and even admits to having given an
incorrect answer, that is sufficient reason for the judge to
discount his testimony in the absence of
corroboration.666
511. Finally, let us state that the
witness's behaviour is a factor which the judge must bear in
mind. In Guay v. Dubreuil,667 it was deemed
that the witness's attitude and stance during questioning,
his way of answering, the feelings he showed during the hearing
with regard to the defendant and his attempt to influence the
judge outside the court were reasons which justified the judge in
attaching less credibility to his testimony.
664. B.C.
c. Damas S.S. et les héritiers de Dame S.S., (1988)
12 C.A.Q. 266.
665.
Dallaire c. Commission des liqueurs du Québec,
(1923) 35 K.B. 379.
666.
Chevalier v. Wilson, (1896) 10 S.C. 59.
667. (1931) 37
R.L.n.s. 6 (S.C.).
[22] I subscribe entirely and without
reservation to this text. Moreover, in it I see an additional
element for concluding that the testimonial evidence submitted by
the Appellant is acceptable, truthful and overwhelming.
[23] In the case at bar, the Appellant
testified and had three of his brothers and a niece called. Each
testified in the absence of the others. I gathered from the
testimonial evidence that the explanations provided by the
Appellant during the audit were always substantially the same,
even if they were corrected with regard to certain aspects.
[24] In general, the testimony was precise
enough, but most of all, it was consistent with regard to its
basic objective. All the witnesses answered without hesitation
and were straightforward and credible. I saw or heard nothing
such as to be dismissed in any of this testimony or any part
thereof.
[25] Obviously, I was able to observe that
some explanations were corrected or changed. Once again, the
witnesses involved once again provided reasonable
clarifications.
[26] According to the Respondent, in order
to set aside or obscure certain facts or explanations regarding
the deciding aspects of the file, I should rely on my intuition
or doubts arising from a description of facts that was not
absolutely perfect. I ought to assume that a cash payment or
inflow is probably something dubious, reprehensible and
unacceptable.
[27] According to the Respondent, I should
not retain the Appellant's evidence because the testimony is
not trustworthy. In order to support her assessment, she relies
inter alia on the following factors:
· A number of
significant receipts and disbursements of funds were made in
cash;
· There were
changes and modifications to testimony regarding certain
sums;
· Net
business income does not permit such a high standard of
living;
· The income
does not permit the use and enjoyment of a luxury motor
vehicle;
· The
capacity of the restaurant is sufficient to generate a much
higher sales figure;
· The amounts
that the Appellant's brothers paid for room and board were
absorbed by the expenses inherent to their occupation of the
premises;
· The dubious
billing at the restaurant;
· The lack of
reliable internal control;
· The
impossibility of confirming the explanations submitted by the
Appellant regarding the receipts and disbursements of funds in
cash.
[28] Certainly, like the Respondent, I
noticed a few small inconsistencies and also some confusion. I
was also able to observe that the Appellant and the members of
his family had food and clothing needs that were rather modest
except with regard to a motor vehicle that generally speaking
requires resources greater than those declared.
[29] On the other hand, the Appellant's
evidence also revealed some points favouring his thesis. I
highlighted some of them, which I list as follows:
· The
witnesses spoke in the absence of one another;
· The
explanations provided were consistent;
· The
explanations were also believable;
· No witness
avoided answering questions or acted as if he did not
understand;
· The answers
given were given without hesitation;
· The answers
and explanations were clear;
· Body
language and verbal language were consistent;
· The
explanations and testimony given at the hearing were
substantially similar to that given during the audit and repeated
at the objection stage;
· The auditor
noticed nothing abnormal and acknowledged that the Appellant had
cooperated fully;
· The auditor
had no grievance;
· The
Appellant can neither read nor write French; this explanation can
not be used to justify the way in which the bills were done but
can explain it;
· The passage
of time must be taken into account to explain or justify certain
inconsistencies and confusion.
[30] The list of grievances raised by the
Respondent is relatively long. Are they sufficient to discredit
the Appellant's evidence? I answer in the negative for the
following reasons:
· These are
grievances based on intuition or pure speculation [e.g.: the
restaurant's potential sales figure];
· The
quantity of objections does not automatically create quality;
· It seems
that the Respondent chose an overview approach rather than an
approach in which she would have been able and would have had to
obtain all the possible details that were likely available on
some elements rather than believing that observation of a number
of small details would have the same impact;
· The
much-debated changes or corrections of the versions to which the
Respondent has accorded great significance are real, but are they
serious to the point of justifying the pure and simple dismissal
of the testimony involved?
[31] Having maintained that he had repaid
$5,000, the Appellant's brother stated that after a more
extensive audit demanded by the Appellant, he had failed to
convince those in charge of his file who were working for the
Respondent. However, it was confirmed that he had indeed repaid
$5,000, in two payments, i.e. one of $2,000 and the other of
$3,000.
[32] I do not claim that the burden of proof
that was on the Appellant deserves a mark of 80 percent and
more; I must decide on the basis of a preponderance of evidence
and not dismiss the appeal for the simple reasons that the
Appellant's evidence raised some doubts.
Penalties
[33] The penalties assessed were based on
subsection 163(2) of the Act which reads:
(2) False statements or omissions 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 of the
greater of $100 and 50% of the total of
. . .
[34] I feel it is important to recall that
the burden of proof, with regard to penalties, is on the
Respondent. I cannot assess the quality of this evidence as there
was none.
[35] The only elements that might have led
to the development of a beginning of such evidence were
intuition, perception and an opinion that was neither supported
not justified by the auditor.
[36] Not only did he not set out any fact
likely to demonstrate negligence or carelessness on the part of
the Appellant, but he rather demonstrated the Appellant's
cooperation and the fact that he had not been able to confirm
some information. However, the auditor, Mr. Guillet, took no
steps to confirm anything; he seemed to assume that the
Appellant's explanations were dubious, given that significant
transactions had taken place in cash.
[37] This point could give rise to
suspicions but was certainly neither sufficient nor conclusive to
justify the assessment of penalties, especially because those who
took part in the transactions were known, had known addresses and
had even provided their version of the facts confirming the
Appellant's version.
[38] For all these reasons, the appeal is
allowed and the assessments, including the penalties, are
cancelled, with costs.
Signed at Ottawa, Canada, this 30th day of
April 2004.
Tardif J.
Translation certified true
on this 17th day of
November 2004.
Sharen Winkler Moren, Translator
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