[OFFICIAL ENGLISH TRANSLATION]
Date: 20010727
Docket: 2000-1181(IT)I
BETWEEN:
HUBERT MORNEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal for the 1995,
1996 and 1997 taxation years. The assessments were made using the
"net worth" method.
[2] The appeal also concerns the
penalties added to the assessments.
[3] The appellant-who bore the burden
of proof, except as regards the penalties-and his wife, Christine
Tremblay, testified in support of the appeal.
[4] Ms. Tremblay, who was responsible
for the basic running of the business, was the main witness. The
appellant essentially confirmed her testimony, adding a few
details and qualifying some aspects, especially as regards the
price paid for a truck purchased in December 1996 and for a power
shovel also purchased in 1996.
[5] Although she was obviously well
prepared, Ms. Tremblay did not give very precise testimony; a
number of her answers and comments were quite confused and
vague.
[6] Generally speaking, the evidence
focused on three areas in particular.
[7] First, Ms. Tremblay
explained that the family residence was transferred to her in
1984 or 1986, following the creation of the family business, to
shelter it from potential financial problems.
[8] As she was the owner of the
residence, Ms. Tremblay argued that the rental income, which
amounted to a little more than $4,000 for each year at issue,
should be attributed to her and not her husband; however, the
evidence on this question showed that the appellant reported the
income as his own in his tax returns.
[9] Second, the appellant's
spouse described the space available in the family residence. She
stated that the business occupied or had the use of half of the
interior of the house, since it occupied one room for its office,
part of the kitchen and a large part of the basement; the
business also occupied part of the yard, in addition to the shed,
to store and house the equipment and machinery it needed. On the
question of space sharing, the appellant's wife said that the
business used 50 percent of the surface area, and she set the
rental value of such use at $500 a month.
[10] Finally, Ms. Tremblay said that
the family had a very modest lifestyle and a very simple social
life that was not very financially demanding; thus, she said, all
they were concerned about was protecting the property they
acquired, instilling good values into the members of the family
and, lastly, earning an honest living for the family.
[11] These are the fundamental points that
emerged from Ms. Tremblay's testimony. The appellant
basically confirmed everything when he testified.
[12] However, the cross-examination of the
appellant and his wife brought out a number of facts that go
against the appellant's position. First of all, it was
established that $5,000 was allocated for food expenses for five
people, including three young people in their twenties. To argue
that this was an inappropriate or excessive amount does not seem
very credible or plausible.
[13] The acknowledgement and admission that
both the truck and the power shovel were paid for in full
(principal, taxes, fees and interest) over a very short period of
time, namely two years for the truck, which cost $9,500 plus
taxes and interest, and three years for the power shovel, which
cost $35,000 plus taxes and interest, totally discredit the
position taken by the appellant.
[14] In addition to discrediting the
appellant's evidence, that fact alone makes it possible to
understand why Denise Tremblay, the business's accountant,
wrote, after the review, that she had been instructed to accept
the proposed assessment. It would be appropriate to reproduce
here the content of her letter (Exhibit A-1):
To:
Kaven Landry
Business File Auditor, Revenue Canada
Date:
March 5, 1999
. . .
Dear Mr. Landry:
My client, Hubert Morneau, the sole proprietor of Morneau
Excavation enr., has asked me to advise you that he has read your
proposed assessment of March 1, 1999, and that he accepts
it, except as regards the food expenses, which according to him
are obviously lower. However, he admits that he is not able to
prove this.
Mr. Morneau and his wife are also sending you a letter in which
they ask you to show leniency in applying the penalty you talked
to them about.
For my part, I request that you make the assessment as quickly as
possible so that I can go ahead, using the corrected T2S(8)
forms, with the filing of the 1998 tax returns. I also request
that you be meticulous in allocating the additional CCA you allow
so that it actually cancels the taxes payable.
I trust you will find this satisfactory. Feel free to contact me,
however, should you need any further information.
Denise Tremblay
Samson Bélair/Deloitte & Touche, General
Partnership
Chartered Accountants
[15] In itself, the content of that letter
signed by the business's accountant is not necessarily
relevant to the validity of the assessment. However, that content
became rather embarrassing when the appellant himself admitted
that he had accepted the proposed assessment and instructed his
accountant accordingly, thinking at the time that the monetary
consequences would not be as serious as they ended up being.
[16] Repudiating such instructions and
refusing to live with the consequences of those instructions
because the cost resulting from accepting the figures was higher
than expected cannot be validly done, especially since the
accountant must have known the consequences of that
acceptance.
[17] The evidence adduced by the
respondent-who bore the burden of proof as regards the penalties
assessed-also made it possible to better understand the content
of and reason for the accountant's letter.
[18] That evidence showed that the
auditors' work on both the audit and the subsequent review
was done judiciously and above all with great generosity. Indeed,
Étienne Sabourin, the chartered accountant who was
responsible for the file at the review stage, said that he had
suggested to the appellant that he claim capital cost allowance
in order to reduce his tax burden.
[19] Although the appellant's wife
indicated that she was traumatized by the length of the audit and
by what the auditor said, it appears from the evidence that the
audit, which lasted three weeks, was conducted in an acceptable
manner and in accordance with good practice.
[20] The evidence showed that the auditors
were lenient and generous in making certain allocations, inter
alia as regards the determination of the basis used for the
calculation of the penalties; such was the case with respect to
the personal expenses paid by the business. Moreover, it was
admitted and acknowledged that the business occupied or used a
surface area equivalent to 30 percent of the family
property, which in itself was realistic, reasonable and
consistent with the evidence adduced in this Court.
[21] It appears that the figures and data
recorded were reasonable and always compiled in the
appellant's favour, which is why I think that the auditors
were sympathetic to the appellant rather than vindictive or
negative toward him.
[22] Moreover, the Court could see that the
appellant and his wife were obviously good, hardworking people
who made every effort to earn an honest living. On the other
hand, the business's accounting was inadequate, and income
was used to pay debts as quickly as possible (witness the truck
and power shovel purchases).
[23] Administrative confusion marked the
business's operations; its income was used for personal
expenses, which is no doubt why the auditors had to stay so long
to conduct the audit. The net worth method had to be used because
the business's accounting did not provide transparency,
consistency and plausibility.
[24] The various findings resulting from the
net worth method are determinative and could not be discredited.
Suffice it to note that the differences found meant that the
appellant, with the income he reported, could not even afford the
minimal expenses that he claimed he had. In other words, the
appellant's assertions were mathematically impossible and
implausible, which is why his logically untenable arguments
cannot be accepted.
[25] As regards the penalties, I admit that I
could have understood or accepted certain explanations if the
unreported amounts had been minor, but the evidence showed that
this was hardly the case. The amounts were in fact substantial,
even though the methods used to determine them were generous.
However, the appellant and his wife believed, and no doubt still
believe, that taxable income is income of which a person has the
use.
[26] The fact that income that can be
identified through adequate accounting is not in one's
possession does not mean that it is not real. Reporting income
that corresponds to less than half of actual income is, beyond a
shadow of a doubt, gross negligence under the Income Tax
Act ("the Act"). Obviously, this may seem
difficult to understand if one sincerely believes that one has
not received that income. In this case, the appellant reported an
amount of about $35,000 as his total income for the
three-year period in question.
[27] However, the audit showed decisively,
and thus on a substantial balance of probabilities, that the
appellant failed to report about $50,000, that is, more than
140 percent of the income he reported for the same period,
which in itself constitutes very gross negligence that is more
than sufficient to justify the assessment against the appellant
of the penalties provided for by the Act.
[28] The appeal is therefore dismissed. In
the circumstances, the penalties assessed were fully
justified.
Signed at Ottawa, Canada, this 27th day of July 2001.
J.T.C.C.
Translation certified true
on this 13th day of February 2003.
Erich Klein, Revisor
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