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Citation: 2004TCC142
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Date: 20040614
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Docket: 2001-4488(IT)G
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BETWEEN:
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ANNIE RICHARD,
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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
(Given orally at the hearing on
September 3, 2003, at Montréal, Quebec,
and amended for clarity.)
Archambault J.
[1] Annie Richard is challenging
the assessments by the Minister of National Revenue
(Minister) for the 1996, 1997 and 1998 taxation years. The
Minister included undeclared income in her taxable income. After
having considered the information provided at the objection
stage, the Minister set this income at $17,241 for 1996, $32,197
for 1997 and $20,821 for 1998, and imposed penalties under the
Income Tax Act (Act).
[2] In her Notice of Appeal,
Ms. Richard also indicated that she is appealing the
assessments under the Excise Tax Act and the Act
respecting the Québec sales tax since they refer to
the amounts of GST and QST for 1997 and 1998. During the hearing,
Ms. Richard acknowledged that the challenge to the
assessments under these two acts was still at the objection stage
and that, as a result, these assessments were not part of these
appeals.
[3] At the beginning of the hearing,
the parties filed a partial consent to judgment in which they
confirmed that the undeclared income to be added to
Ms. Richard's income amounted to $14,890 for 1996,
$22,538 for 1997 and $13,424 for 1998. Ms. Richard
agreed to this consent in order to shorten the hearings and save
costs. The only questions at issue that remain to be resolved are
as follows: first, could the Minister have correctly made the
reassessment for the 1996 taxation year, since it was done after
the normal period for reassessments? In addition, could the
Minister correctly impose penalties under subsection 163(2)
of the Act? In other words, was the Minister justified in making
a reassessment for 1996 as a result of the fact that
Ms. Richard made a misrepresentation that was attributable
to neglect, carelessness or wilful default or committed fraud in
supplying her income tax return for that year, and for each of
the taxation years 1996, 1997 and 1998 (the relevant
period). Was the Minister justified in imposing a penalty due
to the fact that Ms. Richard neglected to declare income
under circumstances amounting to gross negligence?
[4] In addition to the admission
regarding the undeclared income contained in the partial consent
to judgment, in a response to a Request to Admit,
Ms. Richard also acknowledged the following three facts:
during the relevant period she was a member of the Barreau du
Québec, she was practicing law in
Trois-Rivières and her profession as a lawyer
constituted her primary source of income.
The facts
[5] In addition to the facts admitted
and outlined above, it must also be mentioned that the amounts
Ms. Richard declared as income were $5,000 for 1996, $4,360
for 1997 and $1,346[1] for 1998.
[6] During her testimony, the auditor
for the Minister indicated that she had asked Ms. Richard to
provide her with accounting records but Ms. Richard only
provided a single document, a list of all the fees paid by her
clients. After checking with the Société de
l'assurance automobile and the Land Registration Office, the
auditor noted that Ms. Richard seemed to have a better
lifestyle than her declared income would permit and, as a result,
the auditor was not able to verify that the amounts declared by
Ms. Richard were in fact the appropriate amounts. She
concluded that she would have to use another method, computing
the changes in net worth.
[7] Another factor motivating her to
use this method was the fact that all the income and expense
amounts indicated by Ms. Richard in the income statement
attached to her tax returns for 1996 and 1997 were rounded off.
The gross income for 1996 was $15,000 and the expenses, totalling
$10,000, were in multiples of $500 or $1,000. The gross income
for 1997 was $16,180 and the total expenses were $11,820. Other
than rental expenses of $2,520, all the expenses were
rounded off to the nearest $100.
[8] Another item that intrigued the
auditor was the fact that Ms. Richard's declared net
income declined constantly for each of the years, dropping from
$5,000 in 1996 to $1,346 in 1998.
[9] The calculations made by the
auditor to determine the changes in net worth reveal an increase
of $74,478 in Ms. Richard's assets, or an increase of
$29,593 in 1996, $24,333 in 1997 and $20,552 in 1998. The
unexplained changes in net worth were $32,627 in 1996, $32,197 in
1997 and $24,906 for 1998. Among the adjustments the auditor
made to her calculations is a gift of $5,000 from
Ms. Richard's grandmother in 1996 and a bequest of
$13,485 received in 1998. At the objection stage, the
Minister made a new adjustment to take into account an additional
gift of $15,000 from Ms. Richard's grandmother. The
amounts of undeclared income resulting from these adjustments are
$17,241 for 1996, $34,529 for 1997 and $27,525 for 1998.
[10] During negotiation of the partial
consent, additional adjustments were made, decreasing the
undeclared income to $14,890 for 1996, $22,538 for 1997
and $13,424 for 1998, which totalled $50,852 of undeclared
income for this period. These adjustments included capital cost
allowances of $2,361 for 1996, $258 for 1997 and
$693 for 1998. The Minister also allocated additional car
rental costs, so that the totals for rentals then became $7,822
for 1997 and $6,704 for 1998 respectively. For 1997, there is an
additional adjustment of $15,599 as a capital gain. The amounts
allowed as capital cost allowances are based on figures provided
by a certified accountant hired by Ms. Richard.
[11] During her audit, the auditor obtained
certain documents from financial institutions, such as deposit
slips indicating cash deposits totalling $37,300 made
between February 1996 and July 1997, or over a period
of approximately one and a half years. These deposits are $33,000
if the period is reduced to a year (February 1996 to
February 1997).
[12] Finally, among the evidence produced at
the hearing is a deposit slip for a business that sold
Ms. Richard a Harley-Davidson motorcycle on
September 16, 1997, for a total price of $25,419;
$1,000 of this was paid as a deposit at the time of purchase.
According to the slip, the balance of the sale price was paid in
cash on about March 13, 1998. If we add this cash
amount to the $37,300 total mentioned above, we reach a grand
total of cash deposits of $61,719!
[13] The auditor explained her reasons for
establishing the penalty with respect to the relevant period as
follows: she deemed that the amounts of undeclared income
determined by calculating the changes in net worth were
significant amounts, especially compared with
Ms. Richard's declared income. She had not declared all
her income for each of the three years in the relevant period and
Ms. Richard's only source of income was her professional
activities.
[14] Ms. Richard indicated that she
became a member of the bar in 1993 and that she began her
practice in her father's basement. It was not until 1995 that
she rented a small, 300-sq.-ft. office for which she
initially paid less than $300 per month, and then after that,
approximately $300 per month. She confirmed that a large part of
her practice was dedicated to family law. Eighty percent of
her clients paid her advances of not more than $500. On overage,
these advances were approximately $200.
[15] During her testimony, Ms. Richard
also indicated to the Court that she kept books in compliance
with her obligations under An Act respecting the Barreau du
Québec, specifically, that she kept a sheet for each
of her clients which included the client's name, the amount
of advances she might have received - which she deposited in
a trust account - the amount of disbursements and the amounts
billed. She also stated that she had a cash disbursements journal
not only for her trust account but also for her general account.
In the general account she entered all the information related to
the expenses she incurred when exercising her profession.
However, Ms. Richard did not produce any of these books. Nor
did she deem it useful to have the syndic testify to corroborate
her assertion that he had told her she was not required to
provide information on her clients. She said that, on the list
she gave to the auditor, she did not indicate client names, but
she had indicated the plaintiff numbers corresponding to the
legal proceedings undertaken on behalf of her clients and that
she had also added the fees related to simple directions.
[16] When she was cross-examined by Counsel
for the Respondent with respect to her tax returns, specifically
those for 1996 and 1997, Ms. Richard acknowledged that the
amounts entered were estimates. She indicated that she went to
the office of the Ministère du Revenu du Québec
(MRQ) for help filling out these statements. She was
allegedly told that she had to calculate her income by deducting,
not her actual expenses, but the expenses incurred. However, when
questioned about the fact that the amounts for telephone services
were rounded off to $1,500, she was unable to provide an
explanation. Her other answers were equally evasive.
Analysis
[17] The classic decision with respect to
the imposition of penalties and making assessments outside the
normal period for reassessment is Venne v. Canada (Minister of
National Revenue), [1984] F.C.J. No. 314
(Q.L.), which outlined the rule that holds that the burden of
proof is on the Minister in these cases. Regarding the burden on
the Minister with respect to the imposition of penalties under
subsection 163(2) of the Act, there is this passage, which
can be found at page 10 of 12 in the print version of
Venne:
"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. . .
[My emphasis.]
[18] With respect to the Minister's
burden of proof regarding making an assessment outside the normal
period for a reassessment, there is the following passage, at
page 5 of the printed version, in which Strayer J.
writes:
I am satisfied that it is sufficient for the Minister, in
order to invoke the power under sub-paragraph 152(4)(a)(i)
of the Act to show that, with respect to any one or more aspects
of his income tax return for a given year, a taxpayer has been
negligent. Such negligence is established if it is shown that the
taxpayer has not exercised reasonable care. This is surely
what the words "misrepresentation that is attributable to
neglects" must mean, particularly when combined with other
grounds such as "carelessness" or "wilful
default" which refer to a higher degree of negligence or to
intentional misconduct. . . .
[My emphasis.]
[19] I will first address the issue of
penalties. In my opinion, the Minister has discharged his burden
of proof with respect to their imposition. In my opinion, we must
conclude that Ms. Richard neglected to include income in her
tax return and that she did so under circumstances amounting to
gross negligence. There is, here, a "high degree of
negligence tantamount to intentional acting, an indifference as
to whether the law is complied with or not." The factors
permitting me to arrive at such a conclusion are as follows.
First, there is the fact that the undeclared income - income that
Ms. Richard herself acknowledges in the consent to judgment
- represents five times the amount of declared income: $50,852 in
undeclared income, compared to a declared income of $10,706
during the relevant period. Furthermore, Ms. Richard's
income statements produced as evidence reveal a definite degree
of negligence or indifference on her part. The fact that she
described her expense amounts, which were rounded off at $100 or
$1000, as estimates, does not permit the conclusion that this is
a person who is concerned with declaring her income in the
appropriate manner.
[20] Generally speaking, I do not give much
weight to the syndic's statement in his discussion with
Ms. Richard, as reported by her. This is obviously hearsay.
Since there were no objections to them, these statements form
part of the evidence. However, given that these statements have
been reported and it is plausible that there may have been a
misunderstanding with respect to the instructions given by the
syndic, I cannot give much probative value to this piece of
evidence. I would be greatly surprised to learn that the syndic
of the Barreau du Québec is unaware of
subsection 232(1) of the Act, which states that accounting
records are not subject to lawyer-client privilege. There is also
a great deal of jurisprudence that carries the same meaning.
[21] In addition, I cannot imagine that the
representatives of the MRQ could have told Ms. Richard that
she could fill out an income tax return properly only using very
approximate estimates of her expenses. Moreover, this is not what
she said in her testimony.
[22] Another piece of evidence which leads
me to believe that Ms. Richard, on the balance of
probabilities under circumstances amounting to gross negligence,
neglected to declare all her income and that the practice of law
was her primary source of income. It is therefore likely that her
income came from that activity.
[23] Another indicator is the size of the
cash deposits over the two years from February 1996 to
March 1998. First, recall that the largest deposit was the
$24,419 Ms. Richard paid on the balance due on the
Harley-Davidson. There are also the cash deposits totalling
$37,300 made by Ms. Richard, in amounts varying from $100 to
$10,000!
[24] There is also the payment of the cost
of the $60,000 condo purchased by Ms. Richard in
March 1996. The purchase was financed through a
$45,000 mortgage. We must assume that $15,000 was paid in
cash out of Ms. Richard's financial resources, perhaps
from the money given to her by her grandmother. Approximately 14
months later the mortgage loan was paid in full.
[25] There is also the 1996 purchase of a
BMW for $16,893, which was replaced by the lease of a new BMW in
May 1997, at a cost of close to $5,000 per year. The lease
contract required a deposit of $8,823. Thus, if we consider only
the purchase of the BMW ($16,893[2]) and the motorcycle ($25,419 paid in cash in
seven months) and the payment of $60,000 (in 14 months) for the
condo, we note that this is a great deal of money for a person
who declared only $10,000 in income over a
three-year period.
[26] Convinced that Ms. Richard earned
much more professional income - almost five times
greater - than she declared, I do not hesitate to conclude
that she neglected to declare her income under circumstances
amounting to at least gross negligence. Given my conclusion that
the penalties are justified for the three years at issue, it goes
without saying that the Minister also correctly made a
reassessment for the 1996 taxation year. I am convinced that
Ms. Richard, at the very least, made a misrepresentation
that was attributable to neglect, carelessness or wilful
default.
[27] For all these reasons,
Ms. Richard's appeal is allowed with costs to the
Respondent and the assessments are referred to the Minister for a
new review and reassessment, assuming that Ms. Richard
earned additional income corresponding to the amounts indicated
in the partial consent to judgment produced by the parties and
that the Minister correctly made the assessment outside the
normal period for a reassessment for 1996 and imposed penalties
for the relevant period.
Signed at Ottawa, Canada, this 14th day of
June 2004.
Archambault J.
Translation certified true
on this 10th day of November 2004.
Shulamit Day, Translator
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