Roland Morin v. Minister of National Revenue, [1988] 2 CTC 2334, 88 DTC 1596

Couture, C.J.T.C. [Translation]:—At the request of Mr. Longtin, C.A., the appellant's agent, some adjustments were made to the assessment by the so-called "net assets" method prepared by Mr. Edouard Lussier, the auditor for the Minister of National Revenue. However, following these corrections, the respondent, by a notice of reassessment dated October 15, 1985, submitted that Mr. Roland Morin, a residential construction contractor, failed to report all of his income for 1979, 1980 and 1981, in circumstances amounting to gross negligence within the meaning of subsection 163(2) of the Income Tax Act. The said net asset assessments cover the period from 1978 to 1981, but the 1978 taxation year is no longer in dispute. The unreported amounts, according to the revised assessment by the official at the appeals branch of Revenue Canada, Mr. Miville Marois, amount to $14,041 in 1978, $71,138 in 1980, and $2,697 in 1981, or a total of more than $107,000 [sic] over a three-year period. The quantum of the "unreported" amounts is not challenged by the taxpayer. The only point in dispute is whether the imposition of penalties under the provisions of subsection 163(2) of the Income Tax Act (the Act) for 1979-81 in warranted.

In the circumstances the burden of proof is clearly on the respondent. However, although this is a net assets assessment, which, in the absence of adequate documentation and by its nature necessarily involves certain estimates and sometimes presumptions that are considered logical or reasonable, the cases hold that the evidence by the respondent of its net assets assessment must be accepted as accurate — unless the taxpayer succeeds in establishing through rebuttal evidence that the respondent's assessment is clearly mistaken. The taxpayer therefore has an obligation to overcome the reverse onus if he wishes to prevail.

The penalties in this case were imposed in accordance with the provisions of subsection (2) of section 163 of the Act, the relevant part of which reads, for the purposes of this case, as follows:

163 (2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty. . . .

There is therefore no issue here of "fraud" on the part of the taxpayer, which would have resulted in a quite different proceeding and could have led to criminal prosecutions. Nor is it a case of typing mistakes or accounting errors made inadvertently, or of an inconsequential minor omission. The dispute bears solely on what is meant by a false statement or omission made knowingly or under circumstances amounting to gross negligence within the meaning of subsection 163(2) of the Act.

To escape the penalties provided in subsection 163(2) of the Act, it is necessary, in my opinion, that the taxpayer's attitude and general behaviour be such that no doubt can seriously be entertained as to his good faith and credibility throughout the entire period covered by the assessment, from 1978 to 1981.

The respondent's evidence demonstrated to my satisfaction that the so- called net assets assessment was warranted, given the inadequacy of the bookkeeping by Mrs. Morin, the appellant's spouse. The lack of significant figures and documentation made it impossible for the auditor to reconcile the appellant's income for the years in question. In fact, the only business record was a single-entry bookkeeping in which the amounts of sales and expenditures were written in a book (subsequently in two books). In short, it was a form of cash basis accounting which, in the case of a construction contractor, is impermissible under the Act. At the time of the assessment there was no accounting entry that could be considered as an accrual basis of accounting, as required by the Act. To try to reconcile the appellant's income, the respondent's auditor had to adjust the figures from a cash basis to an accrual basis.

I am also satisfied that Mr. Edouard Lussier and Mr. Miville Marois acted prudently and fairly in the final calculation of the assessment. During the audit, in almost impossible circumstances, Mr. Lussier, in order to obtain further information on the appellant's income, consulted the taxpayer's chartered accountant, who was then Mr. André Messier. In addition, Mr. Lussier and Mr. Marois, after obtaining certain vouchers and agreeing with Mr. Longtin on a series of adjustments to the original assessment, submitted to the taxpayer and Mr. Longtin the draft revised assessment that the respondent proposed to send them, giving them 30 days in which to make any corrections or other adjustments that they considered appropriate. No additional change was made or suggested in the margin of the revised assessment. In fact, as already pointed out, the amounts of the "unreported" income are not challenged by the appellant.

It is obvious that the appellant is not an accountant and it is possible that he does not know much about tax matters — which is undoubtedly why he retained the services of Mr. André Messier, a chartered accountant. But it ought not to be concluded from this that the appellant, who has been in the construction field since 1963 and running his own contracting business since 1976, was completely ignorant or unaware of his personal obligation to report all his income for each year.

It is also hard to believe the appellant’s contention that he is so unable to distinguish between revenues, expenses and profits that at the end of the year he does not know whether, for income tax purposes, his business has achieved a profit or suffered a loss. This testimony is unacceptable to me. The appellant stated he has a particular interest in the value he can claim for his share of properties purchased in partnership with his brother and on which some residences belonging to the appellant were constructed. Similarly, in order to ensure that his business turns a profit, the appellant always tries to get the best prices possible from his sub-contractors. I am not prepared to accept that for the purposes of his business, the taxpayer understands quite well the difference between a profit and a loss, but for tax purposes he does not even know what his income is.

I conclude that the appellant was not only aware of his obligation to report all his income annually, but that he knew approximately how much income his business generated each year and was in a position to detect any serious anomalies that might be found in the tax returns prepared by Mr. Jessier.

The mere fact that he retained the services of a chartered accountant does not exempt the taxpayer from his obligation to ensure the accuracy of his tax returns. Furthermore, an accountant's work cannot be more complete or accurate than the figures and documentation the taxpayer is prepared to provide to him.

In her testimony, Mrs. Pauline Morin, the appellant's spouse, stated that since 1976 she had been entering only the expenses and income of the appellant's business and that every month she took the book or books containing these entries to the accountant, Mr. Messier. For her part, Mrs. St-Pierre-Foisy, who was Mr. Messier's secretary from 1977 to 1985, confirmed Mrs. Morin's statement and added that with the information thereby received she carried out the deductions at source. She also stated that the appellant's financial statements were incomplete and contained only income, expenses, and the applicable depreciation. Mr. Lussier had stated in his testimony that there was no personal balance sheet attached to the tax returns at the time when he initiated the assessment of the appellant's income.

The appellant, for his part, stated that he was aware that, in order to obtain his construction licence from the Office de la Construction du Québec, he had to submit to it annually a balance sheet that he had his accountant, Mr. Messier, prepare. In fact, Mrs. St-Pierre-Foisy confirmed that the appellant's balance sheet was prepared by Mr. Messier but only several months after the appellant’s tax returns had been filed, in April of each year. In my opinion, the facts indicate that the appellant was not as ignorant as he would like to suggest of the importance to him of maintaining valid, adequate accounts of his firm’s fiscal year. Furthermore, he had a much better idea of his business's financial returns that what he admitted in his testimony.

The Court is also inclined by the taxpayer's rebuttal evidence to the view that Mr. Messier, the accountant, was somewhat incompetent, which would explain the unreported income. Unfortunately, there are no facts to corroborate this allegation. For one reason or another which has not been explained to the Court, the accountant Messier did not testify and the nature and kind of mandate that the accountant might have been given by the appellant were not disclosed. What is in evidence is that Mrs. Morin took the business's income and expenditures ledger to the accountant's office every month, but without the inclusion of the invoices or other relevant vouchers. On the basis of this incomplete information, we are told, the tax returns and unsworn financial statements were prepared.

The issue that is posed is whether in such circumstances this conduct on the part of the appellant can be considered, for tax purposes, that of a responsible and prudent businessman. I am convinced on the facts that the appellant was extremely well informed of the state of his affairs and that he recognized as well his personal liability in relation to the requirements of the Act. In the absence of any direct evidence that would allow me to conclude that the accountant Messier was incompetent or dishonest, I must conclude that the appellant did not give his accountant all of the relevant accounting information pertaining to his company's fiscal year, as he could have done. The result is the erroneous tax returns that are now at issue. I conclude, therefore, that the false statements or omissions in the appellant's tax returns were made with the knowledge of the appellant.

On the other hand, were the false statements or omissions in the appellant's tax returns made in circumstances amounting to gross negligence? The fact that a construction contractor with several years of experience did not keep adequate or even suitable accounts in itself demonstrates, in my opinion, the existence of gross negligence.

Furthermore, although the appellant's bookkeeping was incomplete, it is inconceivable that he himself could have purchased, as the evidence disclosed, term deposit certificates worth $40,000 in 1980 and declared only $29,000 in income in 1980 without noticing the existence of a glaring anom aly in his statements. Likewise, it is in my opinion impossible that the appellant failed to realize the enormous discrepancy of $76,000 between the income reported and the income actually generated by his business in 1981. While admitting that the appellant is not an accountant, it is nevertheless in evidence that he is an astute businessman and sufficiently intelligent to realize that, once again, not all of the income of his business had been reported for the 1981 taxation year.

The appellant wrongly submits that as a taxpayer he fulfilled his fiscal obligation by signing reports prepared by an accountant without at the same time ensuring himself of the accuracy of these reports or verifying the amounts of income entered therein. In my opinion, this was another instance of gross negligence, since by his own testimony the appellant read closely and understood the implications of all the clauses in the various business contracts he signed, but when it came to tax returns he admitted that he signed them without even reading their contents on the pretext that he understood absolutely nothing about accounting. The fact is that the appellant was in a position to judge whether his tax returns accurately reflected the income from his business — which is what he failed to do.

In my opinion, the appellant has not succeeded in rebutting the evidence submitted by the respondent concerning the net assets assessment. The facts described above, among other things, are sufficient for me to conclude that the appellant knowingly and under circumstances amounting to gross negligence failed to report all his income for the 1979, 1980 and 1981 taxation years, which is the sole disputed issue in these appeals. The penalties imposed pursuant to subsection (2) of section 163 for 1979, 1980 and 1981 shall therefore be upheld and the appeals dismissed. For the 1978 taxation year the respondent, by an assessment dated October 15, 1985, revoked the penalty charged pursuant to the May 15, 1984 assessment and, accordingly, since there are no further grounds of appeal for that year, that appeal is dismissed.

Appeals dismissed.