Citation: 2013 TCC 63
Date: 20130221
Docket: 2012-2890(IT)I
BETWEEN:
NICOLE FONTAINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1]
The appellant appealed
the reassessments made by the Minister of National Revenue (Minister) under the
Income Tax Act (ITA) for the 2003, 2004 and 2005 taxation years, in which
$18,563, $28,923 and $23,512 were added to her income for each of those years,
respectively. A late filing penalty was also imposed for 2004 and 2005.
[2]
The appellant did not
appear in Court and left it to her counsel to represent her. Counsel for the
appellant informed the Court that the appellant was discontinuing her appeal
for 2005 but still challenging the reassessments made for 2003 and 2004 on the
ground that the Minister was not justified in making them because they were made
after the normal reassessment period.
[3]
The Minister relied on
subparagraph 152(4)(a)(i) of the ITA, which reads as follows:
Income Tax Act
152
Assessment
152(4)
Assessment and Reassessment — The Minister may at
any time make an assessment, reassessment or additional assessment of tax for a
taxation year, interest or penalties, if any, payable under this Part by a taxpayer
or notify in writing any person by whom a return of income for a taxation year has
been filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s normal
reassessment period in respect
of
the year only if
(a) the taxpayer or person filing the return:
(i) has made any misrepresentation that is attributable to neglect,
carelessness or wilful default or has committed any fraud in filing the return
or in supplying any information under this Act, or
. . .
[4]
The only issue, therefore,
is the Minister’s ability to make a reassessment after the normal reassessment
period for the 2003 and 2004 taxation years.
[5]
If I must conclude that
the Minister demonstrated that he was entitled to act as such under
subparagraph 152(4)(a)(i) of the ITA, the appellant does not challenge
these reassessments on the merits.
[6]
As established in the
case law, the onus is on the Minister to prove that he was entitled to reassess
the appellant beyond the normal reassessment period. In that respect, the
Minister must first prove that the appellant made a misrepresentation in filing
her income tax return or in supplying information under the ITA. Second, he
must also prove that the misrepresentation was attributable to neglect, carelessness
or wilful default (see Boucher v. Canada, 2004 FCA 46, paragraph 5; and D’Andrea
v. The Queen, 2011 TCC 298, paragraphs 32 and 33).
[7]
The respondent called
Francine Boutin, an auditor with the Canada Revenue Agency (CRA), to testify.
Francine Boutin stated that she was instructed to audit Système Gedoc Inc. (Gedoc),
the sole shareholder of which is the appellant, and the company operated by the
appellant’s spouse, Pierre Nadeau. The audit focussed on the years 2004 and
2005 for Gedoc. Gedoc worked in close association with Pierre Nadeau’s company,
from which it earned significant income. Ms. Boutin explained that Gedoc did
not file tax returns in 2004 and 2005 within the time limit set for doing so. They
were finally filed at the CRA’s request under subsection 152(7) of the ITA.
[8]
While auditing Gedoc’s
books, Ms. Boutin discovered that the company did not have an established
accounting system. Bookkeeping was done on an in-house Excel document. There were
no bank reconciliations of the computer data. Furthermore, she noticed discrepancies
in the balances at the beginning of the year, without any explanations. She
therefore consulted the financial statements for the 2003 fiscal year and
realized that those financial statements had been amended without being brought
to the insight of the government. An adjustment of $100,000 ($50,000 of
additional income and $50,000 of over-expenditures) was made.
[9]
By examining the list
of expenses by item and by date (a part of which was filed as Exhibit I-1), and
the financial statements (including those that were amended for 2003) filed as
Exhibit I-2, she discovered management fees. The management fees were withdrawals
from Gedoc’s bank account by the appellant. After an initial meeting, the
appellant asked Ms. Boutin to have a discussion with her spouse, Mr. Nadeau,
because he was in charge of the accounting for the two companies. According to
Ms. Boutin, Mr. Nadeau merely told her that the management fees in
question were fees for managing the company. No other explanation was provided.
Ms. Boutin then found that, for a three-year period, the appellant had only reported
income for which a T-4 slip had been issued. Thus, she filed $12,128 in 2003, $12,703
in 2004 and $17,250 in 2005 (Exhibit I-3), which, according to Ms. Boutin, were
the amounts allegedly accounted for by Gedoc in the company’s general salaries
line item. The management fees, accounted for in a separate section of the
company’s books, were not reported by the appellant in her income tax returns
for the three years in question. They were $18,563 in 2003, $20,961 in 2004 and
$19,823 in 2005 (Exhibit I‑1).
[10]
Furthermore, Gedoc had reimbursed
the appellant some personal expenses, that is, $3,439 in 2004 and $2,930 in
2005 (see paragraph 20(e) of the Reply to the Notice of Appeal). Mr. Nadeau purportedly
did not challenge this.
[11]
In her Notice of Appeal
(paragraph 15), the appellant stated that the amounts recorded as management
fees should have instead been recorded in the shareholders’ loans account. Ms.
Boutin stated that Mr. Nadeau never mentioned this during the audit. The
explanation was allegedly given when the draft assessment was presented. However,
no note or document establishing a loan was submitted in the appellant’s record.
Furthermore, in Gedoc’s statement of accounts, no amount was provided in the [Translation] “Due to shareholders” line. This was
therefore not accepted. Ms. Boutin found that the amounts unreported by
the appellant in her income tax returns corresponded to more than half of the
income reported over a three-year period, when there were several consecutive
withdrawals (as indicated in item [Translation] “060 Fees – Management”, in the list of expenses by
item and date, Exhibit I-1).
[12]
Moreover, if there was indeed
an accounting error, as the appellant seems to have indicated in her Notice of
Appeal, they had ample time, over three years, to correct the error, which was
not done.
[13]
In cross-examination, Ms.
Boutin pointed out that the information in the Notice of Appeal that the
appellant had started to reimburse Gedoc was never brought to her attention and
was therefore never audited.
Analysis
[14]
Counsel for the
appellant maintains that the respondent inferred the appellant’s wilful default to report income by proxy. He
contends that Ms. Boutin’s testimony alone was insufficient and that the
respondent should have called the appellant and her spouse, Mr. Nadeau, to
appear as witnesses. He argues that the respondent had to prove that there was
neglect, which he suggests was not the case.
[15]
Counsel for the
appellant acknowledges that there was misrepresentation of income in the
appellant’s income tax returns.
[16]
Therefore, I need to determine
whether the respondent demonstrated that the misrepresentation was attributable
to neglect, carelessness or wilful default.
[17]
In Venne v. Canada,
[1984] F.C.J. No. 314 (QL), cited by the respondent, it was decided that negligence
is established if it is shown that the taxpayer has not exercised reasonable
care. Furthermore, it is not enough to suggest wilful default. There must be some
evidence to support a finding of wilful default (D’Andrea, above, at
paragraph 44).
[18]
Counsel for the
appellant maintained that the absence of the appellant’s testimony resulted in
the respondent not being able to discharge her burden of proving neglect,
carelessness or wilful default. I am of the opinion that the absence of that
testimony cannot be attributed entirely to the respondent.
[19]
The appellant was appealing
not only the reassessments for 2003 and 2004, but also the assessment made for
the 2005 taxation year, which was not statute-barred. It was only on the
morning of the hearing that her counsel informed the Court that she was discontinuing
her appeal. Because the respondent was not informed, it is logical that there
was an expectation for the appellant to appear in Court to, at least, prove
that the 2005 assessment was unfounded. Therefore, the respondent cannot be
blamed unilaterally for the appellant’s absence.
[20]
Regarding Mr. Nadeau’s absence,
it is true that his presence would have been useful. However, I am of the view
that the documentary evidence submitted by the respondent is sufficient in this
case to convince me that the appellant made a misrepresentation in her 2003 and
2004 income tax returns that was attributable to neglect, carelessness or
wilful default.
[21]
The unreported amounts
correspond to the management fees that were recorded in the company’s books.
Those amounts are withdrawals made by the appellant from Gedoc’s bank account directly
(Exhibit I-1), and are more than half of the amounts reported by the appellant
in her tax returns. If that was actually an error, that error was made for
three consecutive years without any corrections.
[22]
Ms. Boutin did not
receive any supporting documentation establishing that Gedoc was indeed making advances
to the appellant, as a shareholder.
[23]
Furthermore, Ms. Boutin
was able to find that the bookkeeping was not entirely adequate in that she was
unable to find any bank reconciliations with the list of expenses by item and
date.
[24]
Beyond the weak
explanations that she received from Mr. Nadeau, who, if present, could have
perhaps qualified Ms. Boutin’s testimony, I am of the opinion that Ms. Boutin had
sufficient objective elements before her to prove neglect, carelessness or
wilful default. In my view, there is no reasonable care when one withdraws
funds from a company and fails to report them in one’s income for tax purposes or
to inform third parties (including the tax authorities) through financial
statements or other accounting that they were advances to the shareholder, especially
when the amounts in question are higher than the reported income by at least
half.
[25]
I believe that the
respondent provided sufficient evidence to demonstrate that the appellant made
a misrepresentation of her income that was attributable to neglect, carelessness
or wilful default in her income tax returns for the 2003 and 2004 taxation years.
The Minister was therefore justified in making a reassessment after the normal
reassessment period under subparagraph 152(4)(a)(i) of the ITA.
[26]
The appeals are
dismissed.
Signed at Ottawa, Canada, this 21st day of February 2013.
“Lucie Lamarre”
Translation
certified true
on this 4th day of
April 2013
Janine Anderson,
Translator
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