[OFFICIAL ENGLISH TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Favreau J.
[1]
These are appeals filed by the appellant under the informal procedure from the reassessments dated
March 12, 2012, made by the Minister of National Revenue (the Minister)
under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), as amended
(the Act) for the 2007, 2008 and 2009 taxation years. These appeals were heard
on common evidence with the appeals of Simon Pépin (Docket 2013‑3319(IT)I).
[2]
In making the reassessments dated March 12,
2012, the Minister made the following adjustments to the appellant’s income tax
returns for the 2007, 2008 and 2009 taxation years:
|
|
2007
|
2008
|
2009
|
|
Unreported
income
|
$78,418
|
$31,400
|
$31,478
|
|
Taxable
capital gain
|
|
$23,057
|
|
|
Rental
income
|
$2,034
|
$(785)
|
$(772)
|
|
Change
in net income
|
$80,452
|
$53,672
|
$30,706
|
|
Amount subject to penalty pursuant to section 163(2)
|
$80,452
|
$53,672
|
$30,706
|
|
Penalty
imposed pursuant to 163(2)
|
$9,863.91
|
$8,422.60
|
$4,799.03
|
|
Late-filing
penalty
|
$661.24
|
|
|
[3]
In setting the amount payable by the appellant,
the Minister relied on the following findings and
assumptions of fact set out at paragraph 6 of the Amended Reply to the
Notice of Appeal:
[Translation]
(a) During
the years in issue, the appellant worked as a waitress at a restaurant and bar;
(b) During the course of the audit, the appellant mentioned
to the auditor that the income from tips could be $30,000
per year;
(c) On her tax returns for the 2007, 2008 and 2009
taxation years, the appellant reported total income in the amounts of $13,940, $19,788
and $13,634, respectively;
Unreported income
(d) At the audit stage, a deposit method analysis was performed of
the appellant’s bank accounts and there were significant unexplained discrepancies;
(e) The Minister considers that these discrepancies in the
respective amounts of $78,418, $31,400 and $31,478 are the appellant’s unreported
income for the 2007, 2008 and 2009 taxation years;
Capital gains
(f) On February 1, 2007, the appellant acquired equally with her
spouse, Simon Pépin, an immovable situated at 175-184 Jacques-Lussier Street in
Varennes for $270,000;
(g) In the 2008 taxation year, the appellant disposed of the immovable
for $379,000;
(h) The costs related to the disposition of the immovable were $16,773;
(i) The appellant did not report any capital gains in the 2008
taxation year;
(j) The appellant and her spouse allegedly served
as a nominee;
(k) The Minister did not believe the explanations provided by the
appellant and her spouse regarding the alleged owners;
(l) The Minister added to the appellant’s income a taxable capital
gain of $23,057 representing the appellant’s share (92,227 x 50% x 50%);
Rental income
(m) The appellant and her spouse leased a dwelling unit in the
basement of their principal residence for $600 per month;
(n) In her income tax return for the 2007 taxation year, the
appellant reported gross rental income of $7,200 and claimed a net loss of
$2,943;
(o) In her income tax return for the 2008 and 2009, taxation years the
appellant did not report any rental income;
(p) On September 19, 2011, while being audited, the appellant filed
amended returns for the 2008 and 2009 taxation years. The Minister made the
following adjustments:
|
|
Year
2007
allowed
|
Year 2008
|
Year 2009
|
|
amended
|
revised
|
amended
|
revised
|
|
Gross rental
income
|
$7,200
|
$7,200
|
$7,200
|
$7,200
|
$7,200
|
|
Insurance
|
$1,082
|
$1,082
|
$1,082
|
$1,082
|
$1,082
|
|
Interest
|
$17,443
|
$17,109
|
$17,109
|
$16,728
|
$16,728
|
|
Property taxes
|
$2,800
|
$2,735
|
$2,800
|
$2,809
|
$2,800
|
|
Utilities
|
$3,732
|
$3,612
|
$3,371
|
$3,525
|
$3,667
|
|
Total expenses
|
$25,057
|
$24,538
|
$24,362
|
$24,144
|
$24,287
|
|
Expenses related to the dwelling unit (36%)
|
$9,021
|
$8,834
|
$8,770
|
$8,692
|
$8,743
|
|
Net rental income (net loss)
|
$(1,821)
|
$(1,634)
|
$(1,570)
|
$(1,492)
|
$(1,543)
|
|
Appellant’s portion
|
$(910)
|
$(817)
|
$(785)
|
$(746)
|
$(772)
|
(q) The Minister determined that the appellant had rental losses of
$910, $785 and $772 for the 2007, 2008 and 2009
taxation years, respectively;
(r) The
disallowed expenses were not incurred by the appellant;
Late-filing penalty
(s) For the 2007 taxation year, the appellant was required to file
her income tax return on or before April 30, 2008, and she filed it on May 20,
2008;
(t) the
appellant had a balance owing of $13,224.86;
[4]
In imposing on the appellant the penalty under subsection 163(2)
of the Act, the Minister relied on the following facts:
[Translation]
(a) The facts
mentioned in paragraph 6;
(b) The appellant had to be aware that she was required to report
income from tips and rental income;
(c) The
appellant signed her income tax return for the 2008 taxation year;
(d) The adjustments are substantial in relation to
the income reported, as they represent 87%, 77% and 69% for the 2007, 2008 and
2009 taxation years, respectively;
[5]
At the outset of the hearing, the parties filed
a Partial Consent to Judgment dated July 8, 2014, the terms of which are as
follows:
[Translation]
The parties
consent to the Court rendering judgment, allowing in part
the appeal from the assessments for the 2007,
2008 and 2009 taxation years with respect to the issue of unreported income and referring the matter back to the Minister of National
Revenue for reconsideration and reassessment as follows:
1.
For the 2007 taxation year, the total adjustments
to the appellant’s income shall be $21,080 (decrease of $59,372).
2.
No penalty under subsection 163(2) of the Income
Tax Act shall be applied.
3.
For the 2008 taxation year, the total
adjustments to the appellant’s income (excluding any taxable capital gain) shall
be $16,115 (decrease of $14,500).
4.
No penalty under subsection 163(2) of the Income
Tax Act shall be applied to the amount of $16,115.
5.
For the 2009 taxation year, the total adjustments
to the appellant’s income shall be $21,078 (decrease of $9,628).
6.
The penalty under subsection 163(2) of the Income
Tax Act shall be applied and calculated accordingly.
WITHOUT COSTS.
[6]
Following the filing of the Partial Consent to
Judgment, the sole issue is whether the Minister was justified in adding to the
appellant’s income the amount of $23,057 as a taxable capital gain for the 2008
taxation year, under paragraph 38(a) of the Act.
[7]
The appellant alleges that the capital gain
realized from the sale of the immovable at 178, 180, 182 and 184
Jacques-Lussier Street in Varennes (the immovable)
cannot be attributed to her because she was acting as a 50% nominee for
Alexandre St-Pierre, a friend whom she had known for about ten years.
[8]
During the testimony of the appellant, Simon
Pépin, her common-law spouse, and Alexandre St-Pierre, the following documents
were filed:
(a) the notarial purchase contract dated February 1, 2007, under
which Simon Pépin and Sabrina Dallaire Tremblay acquired an undivided 50%
interest in the immovable for $270,000; the gross rents for the leases in force
at the date of purchase were $2,145.00 per month;
(b) a deed of residential hypothecary loan dated January 30, 2007,
under which Corporation Hypothécaire Xceed and Corporation de Capitaux Xceed made
a loan to Simon Pépin and Sabrina Dallaire Tremblay in the amount of $264,836.25
at the annual interest rate of 6.95%, calculated on a semi-annual basis, and
not in advance, over a term of three years secured by a first ranking hypothec on the immovable. The repayment of the loan (principal and interest) was made in equal
and consecutive monthly instalments of $1,664.42;
(c) the notarial contract of sale dated July 3, 2008, under which Simon Pépin
and Sabrina Dallaire Tremblay sold the immovable for $379,000;
(d) a photocopy of a cheque dated July 3, 2008, drawn on the
notary’s trust account made payable to Sabrina Dallaire Tremblay in the amount
of $92,227.30;
(e) a photocopy of a cheque dated July 8, 2008, drawn on the account
of Sabrina Dallaire at the Caisse Populaire de Varennes made payable to Karine
Meunier in the amount of $42,227 and a photocopy of another cheque dated July 8,
2008, drawn on the account of Sabrina Dallaire at the Caisse Populaire de
Varennes made payable to François St-Pierre in the amount of $50,000;
(f) A nominee agreement under private writing dated January 5, 2007,
signed by Sabrina Dallaire and Alexandre St-Pierre under which the parties agreed,
inter alia, as follows:
[Translation]
2. Sabrina Dallaire states that she acted
in accordance with the instructions of Alexandre St-Pierre in the performance
of her duties as acquirer of the property and that she only acted for the
benefit of Alexandre St-Pierre.
3. Simon Pépin and Sabrina Dallaire are
responsible for notifying Alexandre St-Pierre orally or in writing upon
disposition of the property.
4. Alexandre St-Pierre shall then assume
full tax liability upon disposition.
5. This agreement is executed in accordance
with the laws of the province of Quebec.
6. The parties acknowledge that Sabrina
Dallaire has no interest in the potential acquisition of the property and acts
for and on behalf of Alexandre St-Pierre.
(g) A nominee agreement under
private writing dated January 5, 2007, signed by Simon Pépin and Alexandre
St-Pierre under which the parties agreed, inter alia, as follows:
[Translation]
2. Simon Pépin
states that he acted in accordance with the instructions of Alexandre St-Pierre
in the performance of his duties as acquirer of the property and that Simon
Pépin only acted for the benefit of Alexandre St-Pierre.
3. Simon Pépin and Sabrina Dallaire are
responsible for notifying Alexandre St-Pierre orally or in writing upon
disposition of the property.
4. Alexandre St-Pierre shall then assume full
tax liability upon disposition.
5. This agreement is executed in accordance
with the laws of the province of Quebec.
6. The parties acknowledge that Simon Pépin has
no interest in the potential acquisition of the property and acts for and on
behalf of Alexandre St-Pierre.
(h) A
document entitled [Translation] “Notice and acceptance of end of mandate as
nominees in the acquisition and disposition of a property (July 10, 2008)” signed by Sabrina Dallaire, Simon Pépin and Alexandre St‑Pierre
under which Sabrina Dallaire and Simon Pépin acknowledge (i) having acted
as nominees for Alexandre St-Pierre in the acquisition and sale of the
immovable; (ii) that the mandates of Sabrina Dallaire and Simon Pépin were
limited to the acquisition and management of the immovable until it was sold; and
(iii) that following the sale of the immovable on July 3, 2008, the mandates
expired.
[9]
The issue is who actually
owned the immovable between February 1, 2007, and July 3, 2008. The testimonies
of the parties involved are vague, imprecise and contradictory in many respects.
[10] During her testimony, Sabrina Dallaire revealed that
she had known Alexandre St‑Pierre for about ten years and that he was a friend. However,
she was very vague about the circumstances of their initial encounters and frequency
of their subsequent encounters. She stated that Alexandre St-Pierre asked her
to purchase the immovable because he did not have the financial resources to
purchase it himself. She also indicated that she did not owe Alexandre
St-Pierre any money and that he was not a biker or a drug dealer.
[11] With respect to the acquisition, management and sale of the immovable,
Sabrina Dallaire revealed that she did not visit the immovable prior to acquiring
it, that she did not negotiate the hypothecary loan, that she did not sign the tenants’
leases and collect the rents, and that she did not take steps to sell the immovable.
More specifically, she indicated that Alexandre St-Pierre collected the rents paid
by cheque or in cash and that he gave her the cheques and cash so that she
could deposit them in her bank account to make the payments on the hypothec. The
net proceeds from the sale of the immovable were also deposited in her own bank
account.
[12] Sabrina Dallaire also submitted that she never received any remuneration
or consideration for performing the [Translation] “small service” for Alexandre St‑Pierre.
[13] During the audit, Sabrina Dallaire indicated to the Canada Revenue
Agency (the CRA) that there was no nominee
agreement while her agent subsequently submitted such an agreement. She stated
that she did not draft the nominee agreement or the end
of mandate as nominee agreement. She acknowledged having signed said
agreements but she did not confirm whether the dates these agreements were signed
were indeed the dates appearing on the documents.
[14] During her testimony, Sabrina Dallaire was unable to explain the reasons
the notary issued a cheque to her only representing all of the net proceeds
from the sale in the amount of $92,227.30 when she only had an undivided 50% interest
in the immovable. However, she confirmed that she prepared and signed the cheques
made payable to Karine Meunier and François St-Pierre and that she gave them to
Alexandre St-Pierre.
[15] During his testimony, Simon Pépin acknowledged that in 2007 he
purchased an undivided 50% interest in the immovable on behalf of and for the
benefit of Alexandre St-Pierre, whom he identified as an acquaintance rather
than a friend. He confirmed that he had been the spouse of Sabrina Dallaire since
2004 and that he co-owned with her the family residence located at 152 De la
Marine Street in Varennes which contains one leased dwelling unit, and that he
was also the sole owner of another immovable located at 40 Vallon Street in Terrebonne
that is also leased.
[16] Simon Pépin indicated that he did not owe Alexandre St‑Pierre
any money at the time of acquisition of the immovable and that he did not
receive any form of compensation for the [Translation] “small service” he performed for him. He acknowledged that he did not report, in computing his income
for the 2007 and 2008 taxation years, the rental income generated by the immovable
and he confirmed that he did not take steps to sell the immovable. He was present
at the notary’s office for the signing of the deeds of purchase and sale of the
immovable.
[17] Alexandre St-Pierre also testified at the hearing. He is a student in
the Department of Biomedical Sciences at the University of Montréal and, he is currently
completing a paid internship at the Institute for Research in Immunology and
Cancer.
[18] Alexandre St-Pierre confirmed the existence of a mandate for Sabrina Dallaire
and Simon Pépin because, in 2007, he did not have the financial ability to
acquire the immovable. He indicated that he found the immovable being sold on
the Internet, that he visited it prior to acquiring it and that he noticed that
the four dwelling units were being leased. He could not recall the exact amount
of the monthly income generated by the immovable but indicated that the income was
close to the operating and financing costs.
[19] During his testimony, Alexandre St-Pierre was very vague and imprecise
when the issue of the signing of leases and the collection of rents was raised.
At first he said that he presented himself to the tenants as the owner of the
immovable only to then claim that the rents were sometimes collected by him and
on other occasions by Sabrina Dallaire and/or Simon Pépin. He could not recall
to whom the rent cheques were made payable. As for the leases, he could not
recall who had signed them, or who sent the renewal notices to the tenants in
2007 and 2008. He also confirmed that he did not report, in computing his
income, the rental income generated by the immovable.
[20] Alexandre St-Pierre revealed that he did not take steps with the
bank to negotiate the terms of the hypothec and that he was neither present at
the notary’s office for the signing of the purchase and sale documents for the immovable
nor at the bank for the signing of the hypothecary loan documents. He could not
recall whether a listing contract for the immovable had been signed with a real
estate agent or the exact amount of the profit realized from the sale of the immovable
(according to him, the profit was between $40,000 and $70,000).
[21] The most telling fact in the testimony of Alexandre St-Pierre is without
a doubt his allegation that Sabrina Dallaire and Simon Pépin received thousands
of dollars for their good services. Furthermore, he justified the issuance of
the cheques to his aunt Karine Meunier and his uncle François St-Pierre by the
fact that he owed his uncle the amounts in question following his financial support
in several other projects.
[22] Alexandre St-Pierre stated that he took the nominee agreement templates
from the Internet and that he had full knowledge of the tax consequences that
could result from the application of said nominee agreements.
Analysis
[23] The witnesses gave contradictory and irreconcilable versions of the
facts, including the consideration obtained by Sabrina Dallaire and Simon Pépin
for having acted as nominees, the identity of the person who negotiated the
terms of the hypothec with the bank and the identity of the person who managed
the immovable.
[24] The testimony of Alexandre St-Pierre was particularly unclear and imprecise
and was inconsistent with the documentary evidence such as the purchase price
of the immovable, the amount of the hypothec, the amount of the monthly rents, the
identity of the person who signed the leases and who collected the rents, the selling
price of the immovable and the amount of the profit realized upon the sale of
the immovable.
[25] No explanation was provided as to why the notary handling the sale of
the immovable only issued one cheque made payable to Sabrina Dallaire when she
only had an undivided 50% interest in the immovable. Sabrina Dallaire did not
provide any clear explanation as to the circumstances giving rise to the issuance
of the cheques made payable to François St-Pierre and Karine Meunier of which
the amounts corresponded exactly to the net proceeds of the sale of the immovable.
[26] Other witnesses could have corroborated the facts, such as the tenants
occupying the immovable during the years in question, the bank representative
who granted the hypothec, the notary who handled the sale, the real estate
agents, if any, who were involved in the purchase or sale of the immovable, or
the aunt and uncle of Alexandre St-Pierre.
[27] The analysis of the documentary and testimonial evidence filed in
these appeals leads me to conclude that Sabrina Dallaire and Simon Pépin were
not the true owners of the immovable.
[28] I do not believe that a young waitress in a bar or restaurant, who
was 21 years of age when the immovable was acquired, had the financial ability
with her spouse, an autobody repairman in 2007, to qualify on their own for a
hypothecary loan of $264,836.25, that is, 98% of the immovable’s purchase price
and make monthly hypothecary payments of $1,664.42 when the amount of the gross
monthly rents was only $2,145.00.
[29] In my view, someone else had to have intervened to negotiate the
terms of the hypothec and guaranteed the repayment and that someone could very
well be a person who received a portion of the net proceeds from the sale of
the immovable. However, I need not decide this issue in the resolution of these
appeals.
[30] For these reasons, the appeals are allowed.
Signed at Ottawa,
Canada, this 5th day of January 2015.
“Réal
Favreau”
Translation certified true
on this 7th day of March 2015
Monica Chamberlain,
Reviser
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