REASONS FOR JUDGMENT
Tardif J.
[1]
The appeals concern the appellants’ 2010, 2011, 2012,
and 2013 taxation years. The parties agreed to proceed with a single hearing on
common evidence.
[2]
With respect to the 2010 taxation year, the
reassessments were done after the usual three-year period; moreover, penalties
were imposed on the appellants pursuant to subsection 163(2) of the Income
Tax Act (the “Act”).
[3]
For the entire period covered by the reassessments,
Pascal and Yann Cyr, the appellants, each held 49% of the shares of the company
“Les Toitures Cyr Inc.”. The company’s activities involved the construction and
renovation of properties.
[4]
On March 3, 2009, Pascal and Yann Cyr jointly purchased
equal shares of a property located at 765 De La Fresnière St., in Québec City. To
do so, they spent $155,000.
[5]
According to their testimony, it was planned
that the company “Les Toitures Cyr Inc.” would acquire the property in question.
However, in fact, the appellants purchased it personally. From the time that it
was purchased, the objective was to do repairs and improvements to resell it at
as soon as possible.
[6]
To finance the acquisition, the Caisse populaire
des Rivières Chaudières et Etchemin granted them a personal loan for $155,000, the
entire amount required for the purchase. The appellants then opened a joint
bank account at the same institution.
[7]
Pascal Cyr explained that they had to proceed
like this because the Caisse populaire did not want to make such a loan to
their company. It appears that a personal guarantee was not contemplated. The
appellants must, however, have excellent financial credibility since they
obtained a loan for the entire purchase price.
[8]
Following the purchase, the appellants did $17,850
in renovations. The entire amount invested for the work was assumed by their
company; in other words, the company paid for all the expenses to renovate the
property that they had purchased in a personal capacity.
[9]
After the appellants completed the work, they
sold the property on April 26, 2010, i.e. a little more than a year after
purchasing it, for $260,000, therefore making a good profit.
[10]
Of this $260,000, they deposited $247,136.37 in
their joint account through two deposits, the first on April 28, 2010, in the
amount of $96,962.20 and the second in the amount of $150,174.17, on April 29,
2010.
[11]
The appellants made a joint profit of $92,136.37
($247,136.37 - $155,000) namely $46,068 each, from the sale of the
property.
[12]
The income from the profit was not declared by
the company or the appellants in their income tax returns. In 2010, Pascal Cyr
and Yann Cyr declared total incomes of $27,886 and $29,439, respectively,
therefore not taking into account the profit made from the sale of the property
on De La Fresnière St.
[13]
Between April 29, 2010, and June 22, 2010, the appellants
made several withdrawals from the joint account, for a total of $91,698:
• On April 29,
2010, $2,000 was transferred to Yann Cyr’s personal account.
• On May 4,
2010, an advance of $30,000, drawn on the joint account, was paid to the
company by cheque. In the company’s books, this amount was recorded as a
$15,000 advance from each of the appellants.
• On May 7,
2010, $9,198 was transferred from the joint account to Pascal Cyr’s
personal account.
• On May 21,
2010, $15,000 drawn from the joint account was paid to Yann Cyr by cheque.
• On May 21,
2010, $15,000 was paid to Gestion Normand Gouin Inc. by cheque, drawn from the
joint account. This payment was for a down payment on the purchase price of
land purchased by the company. This amount was recorded in the company’s books
as an advance from the appellants.
• On June 9, 2010,
$13,000 was paid to Stéphane Laroche by certified cheque for the purchase of a “Fifth
Wheel” in the name of Pascal Cyr. This amount was drawn from the joint account.
• On June 22,
2010, $7,500 drawn from the joint account was paid to Marc Bertrand by cheque for
the purchase of a boat in the name of Yann Cyr.
Pascal Cyr
[14]
In 2011, in 2012, and in 2013, Pascal Cyr owned
a Ford Focus 2011 and a Kia Sedona 2002. Pascal Cyr’s spouse did not own any
vehicle during this period. Pascal Cyr also owned two recreational vehicles, namely
a “Fifth Wheel” and an ATV; however, he could not use his Ford Focus 2011 or
his Kia Sedona 2002 to move his recreational vehicles, in particular the Fifth
Wheel.
[15]
In the first 95 days of 2011, the company made a
2006 Ford F-350 valued at $41,000 available to Pascal Cyr. In the final 270
days of 2011, 2012, and 2013, the company made a 2011 GMC Sierra truck,
valued at $73,173, available to Pascal Cyr.
[16]
In 2011, 58,000 km were put on the Ford F‑350
2006 and the GMC Sierra 2011. In 2012, 54,500 km were put on the GMC
Sierra 2011 and in 2013, 56,000 km.
[17]
Pascal Cyr used the 2006 Ford F‑350 and the
2011 GMC Sierra made available to him by the company for personal purposes,
including to visit his family in Gaspésie and to transport his “Fifth Wheel” and
his ATV. Pascal Cyr did not keep a travel log for the vehicles made available
to him by the company and did not declare any automobile benefit in his income
tax returns for the taxation years 2011, 2012, or 2013. To justify his claims, he
stated that he had family and a business in Gaspésie.
Yann Cyr
[18]
In 2011, 2012, and 2013, Yann Cyr did not have
any personal vehicle. His spouse had a 2010 Toyota Corolla during this period.
Yann Cyr also owned a recreational vehicle, namely a boat, that he stored in
Gaspésie.
[19]
In 2011, 2012, and 2013, the company made a 2011
Ford F‑250 available to Yann Cyr. The vehicle was leased by the company
and the monthly lease payments were $1,446.15 ($17,354 annually).
[20]
In 2011, 32,500 km were put on the 2011 Ford
F-250, in 2012, 60,700 km, and in 2013, 48,500 km.
[21]
Yann Cyr used the 2011 Ford F‑250 2011 made
available to him by the company for personal purposes, including to visit his
family in Gaspésie and to transport his boat. Yann Cyr did not keep a travel
log for the vehicle made available to him by the company and did not declare
any automobile benefit in his income tax returns for the 2011, 2012, or 2013,
taxation years.
2010 taxation year
[22]
Was the Minister correct to add $46,068 in
business income to the income of each of the appellants following the sale of
the property that they repaired and improved?
[23]
The appellants purchased and sold the property
in their own name; the proceeds of the sale were deposited in their joint
account. The appellants used these proceeds for personal purposes, including to
purchase recreational vehicles, namely a boat and a “Fifth Wheel”.
[24]
The only amounts paid to the company were
recorded as advances for the benefit of the appellants in the company’s books, with
the effect that the appellants could eventually be paid back by the company,
tax-free.
[25]
In this case, the appellants had the burden of
proof with respect to the principal of the assessments under appeal, and the
respondent had the burden of proof with respect to the penalties and the
limitation period.
[26]
In support of the evidence they submitted, the appellants
admitted the content of almost all of the relevant documents, hastening to add,
however, that the documents had to be interpreted not on their content but
rather based on their actual intention, namely that the purchase and sale of
the property would be effected through the company and not in a personal
capacity.
[27]
According to their claims, the appellants submit
that the assessments should have been established based on their intention
rather than on the true facts, adding that they had not had the time to make
the required corrections to their income tax returns for the years at issue.
[28]
According to them, the entire responsibility for
what they qualify as an error actually results from the negligence and the
incompetence of their agents who were entrusted to manage their accounting. The
appellants stated that there is no doubt on this point in terms of their
instructions to the person responsible for their accounting.
[29]
Very critical and excessively harsh toward those
who handled their accounting, they repeatedly insisted that they should not
have to suffer the consequences of this incompetence and negligence, adding
that they were always cooperative, in good faith, and vigilant in the
management of their affairs. The appellants argued that their agents had
completely ignored their instructions. They placed considerable emphasis on
their incompetence and carelessness in managing the accounting of their file.
[30]
In fact, the evidence indeed shows that the accounting
data of the company was truly an administrative mess. Also, it turned out that the
persons who were taking care of the accounting refused to cooperate during the
audit and, specifically, during an audit carried out by Revenu Québec for the
Goods and Services Tax (“GST”) and Quebec Sales Tax (“QST”).
[31]
Quite surprising, however, they did not have the
persons in question testify, which would have allowed the court to carry out
its own assessment of the situation with regard to the nature of the mandate
conferred and their instructions. It would have been very interesting to
compare the appellants’ version to the version of those responsible for
managing their accounting.
[32]
Pascal Cyr testified; his testimony indicated
that he is an articulate person able to express himself in a clear, even
refined manner; in other words, this is a person we would qualify as bright,
able to understand, analyze, assess, weigh the tax consequences of what he does
and does not do in the management of his personal and professional affairs. There
is no doubt that the appellants knew very well the significant consequences of
what they clearly chose to do.
[33]
The appellants invested a lot in all sorts of
initiatives intended to show the negligence, intolerance, indeed the
incompetence, of the auditors responsible for their file.
[34]
According to the evidence, it is appropriate to
question whether the appellants intended or indeed sought for there to be
confusion. They argued that they had to purchase the property, which generated
a significant profit in several months, in a personal capacity, since the
financial institution had refused to issue a hypothecary loan to the company
that they controlled. They therefore decided to purchase the property in equal
shares in a personal capacity. Again, a representative from the financial
institution did not come to testify.
[35]
On that point, they filed a letter from the
financial institution; it would have been relevant to question the person who
signed the letter to determine whether the alleged refusal could have been
avoided through a personal guarantee.
[36]
A simple letter is certainly not a determinative
piece of evidence if the person who signed it is not cross-examined. The explanation
is even more dubious because the institution granted a loan covering the entire
purchase price of the property, attesting to the appellants’ excellent
financial credibility.
[37]
If the appellants had truly wanted their company
to purchase the property that generated a significant profit, why didn’t they
deposit the profit in that company’s account, especially since the company in
question paid the significant costs for the property’s repairs and improvements?
[38]
These costs were attributed to their company’s
operations, reducing the company’s tax burden. While increasing the personal
profit made on the sale of the property, not only was the profit not attributed
to the company, but it was deposited in the appellants’ personal joint account
to be used in large part to acquire essentially personal property.
[39]
With respect to qualifying the profit made, there
is no doubt that it was business income. All the facts validate the required
criteria and fully satisfy them to be qualified as “business income”. The respondent
therefore properly added the profits made to each of appellants personally; this
was the only conclusion possible based on the facts established by the
evidence. In fact, the planning, implementation, and sale were done with the
objective to make a personal profit; the intention is unequivocal.
[40]
With respect to the other components of the
assessments, they are made up by the attribution of benefits resulting from
each appellant’s use or usage of a motor vehicle for personal purposes.
[41]
On this point, the appellants argued that the
personal usage was absolutely marginal, namely about 2,500 km per year, a
little more than a single trip to Gaspésie every year.
[42]
The appellants’ claims essentially rest on their
word, which they tried to validate with speculation and hypothetical theories,
some of which were far-fetched. It would have been simple, easy, and reliable, if
they had used a special log just for that purpose, which indeed would comply
with the Act in this regard.
[43]
Keeping a log is a simple exercise that does not
require any particular knowledge, that requires little or no effort, but that
is reliable, persuasive, and easy to assess.
[44]
I have no doubt that the absence of these logs
was voluntary, a decision without a doubt motivated by the chance to eventually
downplay the use for strictly personal purposes.
[45]
In the event that the use of a vehicle is shared
by a company and its officer or officers, this can generate a significant
personal benefit for which it is normal and legitimate to establish a standard
to clearly and reliably distinguish between the commercial and personal use,
even more so because there can be a strong temptation to attribute personal use
to commercial operations.
[46]
In Canada, tax liability is based on self-assessment.
Self-assessment is based on the State’s trust in the human and corporate
population.
[47]
In consideration of this, every physical or a
moral person must file an income tax return every year for its income and
expenses, validated by relevant documentation so that it can be audited in
accordance with accepted practices.
[48]
With regard to the use of a commercial vehicle
that is also used for personal purposes, the minimum and essential standard is using
a log to collect clear and unequivocal data.
[49]
In the absence of adequate annual accounting
that is correctly validated by useful and relevant documents, auditing is imprecise,
speculative, even arbitrary. The persons affected by an assessment with which they
disagree would like to put the auditors on trial to identify the weaknesses of
the exercise, thinking they will score points and discredit the validity of the
assessment.
[50]
The appellant of an assessment has the burden of
proof and not the auditor.
[51]
Meeting the burden of proof would certainly
discredit the proceeding or exercise that led to the contested assessment, but
that proceeding alone is not sufficient to discredit the correctness of the
assessment under appeal.
[52]
It is absolutely essential to establish the
validity of ones’ claims on a preponderance of the evidence, by showing the
weaknesses of the assessment; it is still necessary to establish by a
preponderance of coherent, reasonable, reliable, and credible evidence that the
true assessment should have been different.
[53]
With respect to the vehicle use, the appellants
submitted evidence that was entirely unreasonable, arbitrary, and totally
implausible.
[54]
Among other things, they argue that the vehicles
were oversized, not very practical, not very pleasant because of the constant
issues with constraints such as the size and length of the parking spaces in
public places. Yet, vehicles like this are very comfortable, often very
luxurious, practical, and very pleasant for personal trips, and especially very
safe for a family.
[55]
It would have been wiser, more reasonable, and
especially more credible to have assessed the personal mileage more
realistically; by calculating a totally ridiculous mileage (2,500 km/year)
that is not validated by a log, they themselves discredited their claims at
which point the court must validate and accept the assessment of the respondent
who, under the circumstances, is reasonable and credible.
[56]
The appellants insisted a great deal on the fact
that the respondent could have and should have proceeded earlier given that it
had all the information required to do so. This argument is not admissible,
especially since the evidence clearly established that the respondent proceeded
correctly. The respondent can and could establish the assessment in question at
any time by showing that there was fault and negligence.
[57]
On this point, the respondent met the burden of
proof required by showing that the appellants had put a plan into place to
avoid their tax obligation. They attempted to discredit the respondent’s theory
by vehemently stating that the errors and negligence should be attributed to
incompetent, negligent, and irresponsible people.
[58]
With respect to the burden of proof required for
the penalties, the respondent also met the specific burden of proof by showing
that the appellants were grossly negligent and committed a serious fault by
accepting and tolerating gross irregularities. Indeed, several pieces of
evidence suggest that the accounting initiative or complacency was of their own
volition.
[59]
The evidence establishes that these people
clearly acted according to their own instructions; certainly, the appellants
accepted and consented at the very least tacitly to the plan that indeed had
the effect of substantially reducing their tax burden.
[60]
The documentary evidence, the majority of which was
admitted by the appellants, is determinative if not catastrophic for the
position argued by the appellants. Overall, they contradict valid written
instruments; they define themselves as people beyond reproach, and assign
complete responsibility for their accounting on their accountants or auditors.
[61]
The written instruments in the documentary
evidence show, first, the contrary, and, second, certain facts that validate
the respondent’s position; I am referring in particular to essentially personal
purchases made with the proceeds of sale of the property that generated profit.
[62]
Even though the appellants could easily have
modified or corrected the alleged errors, they did absolutely nothing.
[63]
The preponderance of the evidence strongly
indicates that the facts assumed by the respondent are facts that were
established by the appellants. The error scenario is an explanation to avoid penalties
and the establishment of assessments after the three-year period.
[64]
With respect to the other part of the assessments,
namely the taxable benefits for the use of a motor vehicle for personal
purposes, the preponderance of the evidence militates very strongly in favour
of the respondent’s position; in fact, in the absence of a reliable and
credible log, the respondent took into account the provisions of the Act based
on the facts.
[65]
It was clear to me that the true facts underlying
the notices of assessment are not the result of ignorance, incompetence, or
carelessness. If that were the case, everything became so obvious and glaring
that the appellants had to and should have made adjustments; they had the
knowledge, the time, and the resources to do so; either they themselves were at
the root of the situation, or they validated their agents’ accounting. In either
case, they were totally, personally, liable for the gross negligence committed.
[66]
It happens sometimes that an omission or error is
overlooked, in particular if it involves trivial details that will have little
impact on a future assessment. However, when there are significant elements affecting
the tax burden, it is an entirely different matter.
[67]
In this case, the fact that expenses were billed
to the company for renovations to a property that was acquired in a personal
capacity had the effect of reducing that company’s tax burden; also, it made it
profitable to purchase the property in a personal capacity, in particular to process
the transaction.
[68]
This is not an isolated trivial act; rather, it
involved multiple operations carried out over an extended period, which would
normally have given the appellants the time to make a correction or corrections
to comply with what they described as their true intentions, namely that the
purchase and sale of the property be effected by their company.
[69]
I do not accept the appellants’ version because
it is not credible, or even reasonable, all the more so because there is no
valid or credible fact to support their position.
[70]
Overall, the appellants want the court to accept
their version on the pretext of their good faith and to dismiss and blame all
those involved in their case, from the work of the respondent’s auditors to the
agents who were responsible for their file.
[71]
First, the evidence submitted is incomplete and
entirely inadequate, and second, it contradicts valid written instruments that
were signed by the appellants. The assessments were correctly established based
on what was done, and not based on what they would have liked once the audit
has begun and was well underway.
[72]
The appellants deliberately participated in a bold
and totally unacceptable plan whose only objective was to reduce their entire
personal tax burden and that of their company in an abusive and malevolent
manner. It is entirely improbable that one or more people offering accounting
services could have made such gross and obvious errors. They were not trivial
or isolated things, to the contrary: this was malevolent planning whose only
purpose was to draw significant benefits that were not recorded, personally and
for the company that they were responsible for.
[73]
With respect to the time chosen to establish the
assessments, the appellants have the responsibility to act in a proactive manner
rather than gambling with the passage of time and aberrant confusion; they themselves
tolerated this, indeed encouraged this, believing without a doubt that they
could eventually put all of it on the backs of the agents responsible for
managing the accounting of their respective files. According to the appellants’
reasoning, all the other parties involved are incompetent and they alone are
correct, in good faith, and above reproach.
[74]
Finally, I note that the appellants are informed
people and, contrary to their claims, they have sufficient knowledge to be
aware of and understand the tax consequences of their actions and deeds; moreover,
the amounts at issue are significant to the point that indicate true willful
blindness.
[75]
Their approach was simple and conferred
significant tax benefits to them. The appellants hid behind what they qualify
as irresponsible and incompetent accounting. These are serious and unproved
allegations that establish the seriousness of the appellants’ negligence and substantiate
the penalties provided under Act.
[76]
For all of these reasons, the appeals in the
files of Pascal Cyr, 2016‑5215(IT)I, and Yann Cyr, 2016-5217(IT)I, are
dismissed. As for the penalties, the evidence showed that they were
well-founded, so they are maintained.
Signed at
Ottawa, Canada, this 5th day of January 2018.
“Alain Tardif”
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