Clouâtre v. The Queen, docket 97-980-IT-G

Date: 19990521

Docket: 97-980-IT-G

BETWEEN:

JEAN CLOUÂTRE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Tardif, J.T.C.C.

[1] This is an appeal for the 1989, 1990, 1991, 1992 and 1993 taxation years. When the hearing began, counsel for the appellant filed a discontinuance for the 1992 and 1993 taxation years.

[2] The appellant alone testified in support of his appeal; he explained that he had invested time and money to establish a number of chain stores as part of the activities of Maison Dallas Inc. The stores in question sold leather clothing and western-style footwear.

[3] Along with his commercial activities, the appellant spent the little free time he had on a hobby involving the purchase and sale of very special boats. They were relatively short boats, but they were propelled by very powerful motors.

[4] It has been established that the appellant’s company had an accounting system that complied with all generally accepted accounting practices and was therefore beyond reproach.

[5] However, the appellant had no accounting system or records for the transactions involving the motorboats and motorcycles. Those transactions were described as non-commercial activities engaged in basically as a hobby.

[6] The evidence showed that all of the transactions—both the purchases and the sales—were cash transactions. Often, even though substantial sums were involved, the cash received was not deposited in the bank. Moreover, it was noted that banks were rarely resorted to for the transactions involving motor vehicles.

[7] The respondent relied on the “net worth” method to make the assessments at issue because the appellant did not have the usual documentation justifying the increase in his assets.

[8] The auditor, Jean-Pierre Paquette, was never able to meet with or talk to the appellant; the appellant had insisted that everything go through his accountant, who in turn had asked for a very detailed written request for all the information the Department of National Revenue (“the Department”) wanted, which the Department went along with.

[9] Using information that was provided, the Department determined the appellant’s net worth, on which the assessments were based.

[10] Since no discussion with the appellant had been possible, the analysis and the assessments that followed were based on data and information provided solely by the accountant and supplemented by the usual investigation involving the banking institutions where the appellant did business.

[11] In such circumstances, it seems obvious to me that the information provided by the accountant must have been looked at and analyzed very carefully; the data certainly did not come out of nowhere and were certainly not unfounded, especially since the information so provided was not intuitive or spontaneous. Indeed, it will be recalled that the appellant’s accountant provided the information after demanding and obtaining a detailed written list of all the data the Department wanted.

[12] However, at the hearing, the accountant was not present and the appellant questioned the accuracy of the data he had provided. What is more, the appellant disputed the correctness of the value of certain assets as stated by his own accountant, and he did so based on his memory alone, without any reference to documentary evidence.

[13] In addition, the appellant was vague and imprecise throughout his testimony; he did not make use of any written materials. His memory often failed him, and most of his explanations were confused and ambiguous.

[14] When a taxpayer produces a written record—which, in the case at bar, was prepared in co-operation with the taxpayer’s accountant—for the purpose of explaining or justifying a factual situation on which assessments were based, and when the same taxpayer later wishes to deny the content of some of the data in the written materials, that taxpayer must produce evidence more convincing and persuasive than that provided by his or her own oral testimony; if that testimony is muddled and ambiguous, the Court will have to exclude it and rely on the written materials. In other words, to repudiate information already provided in writing, the evidence will have to be fleshed out and supported by decisive elements that are credible and persuasive.

[15] The evidence adduced by the appellant, which was made up essentially of his own evasive testimony, certainly does not reach this minimum threshold; quite the contrary, his testimony instead raised many doubts in terms of plausibility.

[16] Counsel for the appellant very skilfully argued that what was involved was a mere hobby and not commercial dealings engaged in as part of a business; he added, and rightly so, that cash transactions are lawful and legitimate.

[17] It is true that there is nothing to prevent a taxpayer from paying and being paid in cash and keeping large sums of money at home. I also agree with the appellant’s argument that money spent on and invested in a hobby or pastime does not have to be itemized or broken down in sophisticated accounting records. However, I do believe that an increase in assets must be justifiable through reasonable and plausible information, without which it becomes foolhardy to dispute certain findings merely by saying that what was involved was a person’s hobby, however skilful and competent that person was in pursuing the hobby.

[18] A hobby is generally an activity that uses up and occupies the free time of the person pursuing it. It often also requires a financial contribution based on that person’s ability to pay. Some people invest a great deal of money in their hobbies, while others devote much more time to them to make up for their lack of resources.

[19] Expertise, availability or skill may sometimes transform an activity engaged in as a hobby into a profitable undertaking and help increase the assets of the person carrying on the activity. Such profitability is usually the result of having a great deal of time available and being very skilful. More often than not, those who have neither physical skill nor a lot of time available lose money rather than making it.

[20] These are not hard and fast rules, since each case turns on its own facts. This is why it is essential that those who wish to fall back on such an activity to justify or explain an increase in their assets adduce explicit evidence that is fleshed out and plausible. It is certainly not enough to point to a hobby as a catch-all that explains everything. In the case at bar, although the Notice of Appeal refers to the taxpayer’s savings and his mechanical skills, no evidence of these has been adduced. Moreover, the appellant said a number of times that his many stores took up most of the time he had available.

[21] Although the hobby argument may be a plausible explanation of a certain increase in a taxpayer’s assets, I do not think that it can simply be put forward or pleaded, without more, to justify such an increase.

[22] It seems to me to be essential that anyone who advances such an argument be able to state clearly, coherently and realistically how the hobby could have been behind the increase in his or her assets.

[23] It is certainly not enough to fall back on the fact that the activity was not a business and to say that, such being the case, there is no need to maintain an appropriate accounting system.

[24] I recognize that pursuing or engaging in a hobby is not in itself a business in which rationality must be omnipresent, requiring monitoring through accounting procedures so that any questions about the progress of activities may be answered precisely and quickly; on the other hand, taxpayers who rely on such a parallel activity to justify a substantial increase in their assets must be able to provide plausible explanations that are sufficiently detailed and credible and are corroborated by adequate evidence.

[25] Taxpayers who cannot adduce such evidence and whose proof must be based on their testimony alone will have to give testimony whose plausibility and clarity are beyond reproach. Such testimony will have to be precise and complete, making it possible to understand and prove the fact that the increase in the value of their assets does not result from the commercial activity that generates their usual income or from some other activity.

[26] An account whose essential components are set out in a vague or even confused way, with the time at which transactions occurred not being ascertainable in a sufficiently precise manner and with substantial consideration being paid in cash and without it being possible to know the names of the parties to the transactions, certainly cannot be the basis for satisfactory and persuasive evidence.

[27] The appellant had a great deal of time to prepare his case and should have been able to give clear, precise and detailed testimony; yet his memory failed him and he was unable to provide a minimum level of explanations; what is more, he denied certain significant facts even though they had been disclosed in writing by his own accountant.

[28] To illustrate the poor quality of the appellant’s testimony, I consider it helpful to note that he even said that he did not remember or was unaware of the existence of a $10,000 note he signed on December 27, 1990, in favour of his spouse, Suzanne Brunet (Exhibit I-12). The appellant’s assets during the periods at issue were not so substantial that he could forget such an amount.

[29] A number of his answers were preceded by lengthy silences, and he was almost never able to explain the use or origin of cash sums that were nevertheless significant.

[30] Jean-Pierre Paquette, the investigating auditor who prepared and structured the determination of the appellant’s net worth, testified at length. He was obviously very familiar with the entire content of the appellant’s file, and he explained clearly and precisely the process he followed in determining the appellant’s net worth. His answers indicated a perfect command of the file. Despite the numerous and skilful attempts to discredit the soundness of certain data, Mr. Paquette answered without any hesitation. His answers never undermined or refuted the correctness of the assessments; quite the contrary, they corroborated the quality of his work. Mr. Paquette’s approach was realistic, plausible and reasonable given the limitations and restrictions the appellant had himself imposed on him through his accountant.

[31] In other words, the Court considers that the work done by Mr. Paquette is beyond reproach given the constraints he faced and the tools available to him in performing it.

[32] The size of the difference for the 1991 taxation year is such as to show beyond a shadow of a doubt that the appellant had income that was not explained by the weak, imprecise evidence he provided.

[33] We are not dealing here with minor amounts that could have been forgotten or overlooked because of the complexity and scope of the commercial activities in which the appellant was involved. It has been shown that an appropriate accounting system existed for Maison Dallas Inc.’s commercial operations. The additional income therefore could not have come from that business, which made it essential that it be justified through credible explanations.

[34] The very poor quality of the explanations making up the evidence—which was moreover incomplete—consisting solely of the appellant’s vague testimony adequately supports the respondent’s conclusion that the appellant obviously deliberately concealed income. I am therefore of the view that the respondent has discharged the burden of proof that lay upon her to justify the validity of the penalties assessed.

[35] The evidence as a whole—the burden of proof being on the appellant—has not discredited the validity of the assessments; moreover, to have the assessments thrown out, it is not enough to criticize the quality of the work done by the respondent or to point to certain minor errors. This is certainly a relevant method if gross errors can be identified and it can be shown that the work was botched or that those who made the assessment were in bad faith. There again, however, the coherence and reasonableness of the appellant’s arguments will have to be proved on the balance of evidence. In the case at bar, the appellant merely offered weak, incomplete evidence, limiting his approach mainly to attacking the reasonableness of the respondent’s calculations, providing as well circumstantial evidence whose quality was highly debatable.

[36] Despite the laudable efforts of counsel for the appellant, the Court must rule on the basis of the evidence adduced and not on the basis of a hypothesis not supported by the facts.

[37] For these reasons, the appeal is dismissed with costs.

Signed at Ottawa, Canada, this 21st day of May 1999.

“Alain Tardif”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 31st day of March 2000.

Erich Klein, Revisor