Citation: 2013 TCC 56
Date: 20130514
Docket: 2010-3024(IT)G
BETWEEN:
ANDRÉ LENNEVILLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND:
Docket: 2010-3025(IT)G
MARCELLE RHEAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
These are two appeals
from assessments made using the net worth method. The parties agreed to proceed
with both on common evidence.
[2]
The appellants are
spouses and operate together a business whose activities are fishing and the
sale of their catches.
[3]
The appellants sell on
site part of their catches, mainly yellow perch and walleye. Other species are
sold to businesses in Montreal.
They also buy some fish that they process on site. The business is the
appellants' sole income source.
[4]
At the start of the hearing,
the parties made statements whose effect was to amend the assessments to the
appellants' advantage. To avoid any ambiguity, I asked the parties to submit
the agreement they had reached. A few months have now passed and it seems the
parties are unable to act on the Court's request.
[5]
Despite many reminders
from the Registry to provide a copy of the agreement, the parties never did so.
As if that was not enough, counsel informed the Court that they were no longer
in agreement and were therefore leaving it to the Court to draw the appropriate
conclusions from the available evidence; all this caused very long delays.
[6]
The appellants
questioned the auditor, Dany Giroux, at length about the relevance of the net
worth method in making the assessments.
[7]
They questioned the
relevance of this method because all the accounting documents and records were
available and they submitted them with the clearly expressed intention of
cooperating.
[8]
The auditor admitted, moreover,
that he had received the ledger and documents the appellants mentioned. He also
confirmed that they had cooperated.
[9]
The auditor justified
using the net worth method by the fact that the appellants had not put in place
a reliable internal control mechanism, particularly with regard to petty cash. Moreover,
most of the over-the-counter sales were cash transactions, and these
represented around 10% of the business's income. The auditor also noted that
there were discrepancies in the deposits. He explained in great detail the work
that led to the assessments made using the net worth method.
[10]
The cross-examination
of the auditor did not reveal any anomaly, irregularity or abuse whatsoever in
the analysis of the data considered in making the assessments. Quite the
contrary, the evidence showed that the auditor's work was beyond criticism, and
the additions to assets were in no way arbitrary. Moreover, the appellants
admitted that the accounting figures used to establish net worth were accurate.
[11]
The appellants both
testified. Simply and spontaneously, they explained all the basic aspects of
the family business they operated through their partnership.
[12]
The appellant André
Lenneville described the main activity of the business, which was commercial
fishing for a number of species of fish using a 24-foot boat with a 60‑HP
motor.
[13]
All the equipment used
for fishing and for processing fish was such as is found in a small-scale
fishing operation. The catches were brought back to the place of business and
processed in an approximately 800-square-foot building in which there were
refrigerators and freezers. The building was also equipped to smoke fish, in
particular sturgeon.
[14]
Ninety percent of the
production was sold and delivered to businesses in the Montreal area and 10%,
mainly walleye and yellow perch, was sold over the counter at the appellants'
place of business. Clients were locals and some were restaurateurs. Generally, these
clients paid in cash.
[15]
Mr. Lenneville also
explained that fish stocks were decreasing year after year and that their
business was subject to more and more restrictions because of resource
protection measures and constantly decreasing stocks.
[16]
To achieve acceptable
catch levels, fishers, including the appellants, had to acquire new licences
held by other fishers. The evidence shows that the appellants had in fact
purchased the licences of two other fishers.
[17]
Indeed, this tax dispute
can be explained, in very large part, by the acquisition of these two licences,
which led to a significant increase in the value of the appellants' assets.
[18]
The appellant Marcelle
Rheault also testified; she filled in the gaps in her spouse's testimony, more specifically
with regard to the over-the-counter sales. She stated that those sales were
generally cash transactions, except in the case of the restaurateurs, who paid
by cheque.
[19]
Sales were recorded on
a cash register tape and the cash was deposited periodically in one of four
bank accounts.
[20]
Every month, invoices,
accounts, statements and the cash register tapes were given to the person
responsible for doing the accounting, keeping the various records up to date,
filling in the GST and QST reports, and claiming inputs, since the business was
a registrant.
[21]
Marcelle Rheault explained
that certain clients did not pay immediately, which left her husband and her financially
vulnerable and required them to ask for advances on their credit card in order
to meet their financial obligations.
[22]
The appellants are
credible individuals who work extremely hard to make a living. In good faith,
they manage their affairs by relying on their rather limited knowledge of
accounting and taxation; they depended on their accountant, a woman who did not
testify.
[23]
The assessments, which
covered the 2004, 2005 and 2006 taxation years, and are being appealed, impose
penalties under subsection 163(2) of the Income Tax Act (the ITA).
[24]
The appellants argued
that the respondent could not assess them for 2004 because that year was
statute-barred pursuant to subsection 152(4).
[25]
The respondent may make
an assessment or reassessment after the normal reassessment period provided
that she shows the Court that the taxpayer or taxpayers in question were
negligent. The burden of proof in such a case is on the respondent.
[26]
The appeals also concern
the penalties imposed pursuant to subsection 163(2). There as well, the
case law clearly defines the parameters regarding the burden of proof. In fact,
I raised this very issue immediately prior to the respondent's argument.
[27]
In response, counsel
for the respondent simply indicated that the discrepancies between reported
income and unreported income were such that no more is required in order for
the Court to find that the respondent has met her burden of proof.
[28]
Is the mere existence
of significant discrepancies between reported income and net worth sufficient
in itself to allow an assessment to be made for a taxation year that is
otherwise statute-barred under subsection 152(4) or to permit gross
negligence penalties to be imposed in an assessment made using the net worth
method?
[29]
I do not believe that mere
proof of an increase, even a substantial one, in the appellants' net worth is
sufficient for the Court to find that the respondent has met her burden of
proof, particularly since the appellants provided a plausible explanation in
the regard. Here there is no gross negligence or a misrepresentation
attributable to neglect, carelessness or wilful default that would justify an
assessment for a statute-barred year, nor is there negligence amounting to
gross negligence that would justify the imposition of penalties.
Statutory provisions
[30]
Subsection 152(4) of
the ITA sets out the power of the Minister of National Revenue (the Minister)
to make an assessment or reassessment:
152(4) 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 . . .
[31]
Subsections 163(2) and
163(3) of the ITA provide, in the first place, for the imposition of a penalty
for a false statement amounting to gross negligence, and they provide, in the second
place, that the respondent bears the burden of proof:
163(2)
Every person who, knowingly, or under circumstances
amounting to gross negligence, 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 for the purposes of this
Act, is liable to a penalty of the greater of $100 and 50% of the total of . .
.
163(3)
Where, in an appeal under this Act, a penalty assessed
by the Minister under this section or section 163.2 is in issue, the burden of
establishing the facts justifying the assessment of the penalty is on the
Minister.
[Emphasis added.]
Analysis
[32]
In Canada v. Bisson, [1972] F.C. 719, the Federal Court considered
whether the Minister could make a reassessment after the normal statutory
reassessment period where the taxpayer, in good faith, made a misrepresentation
that did not involve any negligence by the taxpayer.
[33]
In that case, the
taxpayer, without any bad faith, failed to include in his income payments made
by a company, of which he was the majority shareholder, to one of his
creditors.
[34]
The Court, after determining
that these payments constituted a shareholder benefit, concluded that the term
"misrepresentation" does not apply in the case of a taxpayer who,
through no negligence on his part, commits an error in declaring his income.
Since "the error committed by respondent is one which a normally wise and
cautious taxpayer could have committed" (page 730), Pratte J. did not allow
the Minister to make a reassessment for the statute-barred years in question. The
gross negligence penalties were also cancelled.
[35]
Judge Lamarre, in Dowling
v. Canada, [1996] T.C.J. No. 301 (QL), undertook a detailed analysis of
the burden of proof the Minister must meet in order for an assessment to be
made for a statute-barred year where a net worth calculation forms the basis of
the assessment. Her analysis is worth quoting:
76
According to these provisions, the Minister may assess beyond the
normal limitation period if the taxpayer has made a misrepresentation that is
attributable to neglect, carelessness, or wilful default. The Minister has the
onus of proving this misrepresentation; however, once the Minister establishes
a right to reassess after the normal period, the burden of proof shifts to the
taxpayer to show that an amount should not be included in his income for the
purposes of making an assessment after that period because the failure did not
result from any misrepresentation that is attributable to negligence,
carelessness, or wilful default.
77
The Minister has the initial onus of proving that a taxpayer made a
misrepresentation in filing the tax return. It is insufficient for the Minister
to refer to a net worth statement showing discrepancies between available
income and reported income. The Minister must prove that this additional income
was from a source that should have been included in the taxpayer's return. The
onus on the Minister will be greater if the taxpayer presents plausible
explanations showing a non-taxable source of this additional income.
78
The Minister's burden of proof was considered in J. Raymond Poulin
v. M.N.R., 87 D.T.C. 113 (T.C.C.). Judge Taylor stated at 116:
...In order for the Minister to assess these
[statute-barred] years, as I understand the case law in this set of
circumstances..., that requires the Minister to substantiate that there is at
least one item for each taxation year "statute barred" which falls
into the category of "...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..."
...it is not the "neglect, carelessness or
wilful default" which warrants the re-opening of a taxation year under
subsection 152(4), it is the misrepresentation which arises therefrom, "in
filing the return or in supplying any information under the Act".
79
In that case, although the evidence showed that the taxpayer's
company had misrepresented its income, there was no evidence that the taxpayer
knew that he was under-reporting his own income. For this reason, the years in
question were statute-barred.
. . .
81
In Farm Business Consultants Inc. v. The Queen, Judge Bowman
set out two questions to be asked in determining whether an assessment is
statute-barred, namely:
1. What misrepresentation is the appellant alleged to
have made?
2. To what was the misrepresentation attributable?
. . .
92 In Lucien Venne v. The Queen, 84 D.T.C. 6247 at
6251, Strayer J. stated the following on the Minister's right to proceed with a
reassessment after the normal period:
I am satisfied
that it is sufficient for the Minister, in order to invoke the power under
sub-paragraph 152(4)(a)(i) of the Act to show that, with respect to any one or
more aspects of his income tax return for a given year, a taxpayer has been
negligent. Such negligence is established if it is shown that the taxpayer has
not exercised reasonable care. This is surely what the word [sic]
"misrepresentation that is attributable to neglect" must mean,
particularly when combined with other grounds such as "carelessness"
or "wilful default" which refer to a higher degree of negligence or
to intentional misconduct. Unless these words are superfluous in the section,
which I am not able to assume, the term "neglect" involves a lesser
standard of deficiency akin to that used in other fields of law such as the law
of tort.
[36]
After finding that, in
that case, the appellant had indeed shown neglect, Judge Lamarre addressed the
issue of the burden of proof the Minister must meet in order to impose gross
negligence penalties:
99 Since the Minister has the burden of
establishing the facts justifying the imposition of penalties, the Minister
must prove the following:
1. that the taxpayer made a false statement or
omission in a return; and
2. that this false statement or omission was made
knowingly or under circumstances amounting to gross negligence.
100 The Minister must prove that the taxpayer made a
false statement or omission in filing its return. The fact that there is a
discrepancy between the taxpayer's increase in net worth and the amount of
income reported for a year will not be sufficient evidence of this. In Richard
Boileau v. M.N.R., 89 D.T.C. 247, Judge Lamarre Proulx stated at 250:
Indeed, the
Appellant was unable to contradict the basic elements of the net worth
assessments. However, in my view, this is not sufficient for discharging the
burden of proof which lies on the Minister. To decide otherwise would be to
remove any purpose to subsection 163(3) by reverting the Minister's burden of
proof back onto the Appellant.
101 Since the Minister in that case relied only on
the fact that the taxpayer could not reverse the net worth assessments, it was
held that the burden of proof had not been adequately discharged; the penalties
were not maintained.
102 The Minister must present evidence to the effect
that the taxpayer made a false statement or omission in filing the return. This
evidence must amount to more than just showing that the net worth statement was
not disproved. Once the Minister proves, on a balance of probabilities, that a
false statement or omission was made in the return, evidence must be presented
that this misrepresentation was made knowingly or under circumstances amounting
to gross negligence. In Venne, supra, Justice Strayer defined gross negligence
at 6256:
..."Gross negligence" must be taken to
involve greater neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional acting, an
indifference as to whether the law is complied with or not.
...The sub-section obviously does not seek to
impose absolute liability but instead only authorizes penalties where there is
a high degree of blamewortheness [sic] involving knowing or reckless misconduct
[6258)].
. . .
105 In
Farm Business Consultants Inc., supra,
the taxpayer had claimed $86,000 paid for goodwill as management fees. In
considering whether penalties should be imposed, Judge Bowman stated at 205-06:
...where a penalty is imposed under subsection
163(2) although a civil standard of proof is required, if a taxpayer's conduct
is consistent with two viable and reasonable hypotheses, one justifying the
penalty and one not, the benefit of the doubt must be given to the taxpayer and
the penalty must be deleted. I think that in this case the required degree of
probability has been established by the respondent, and that no hypothesis that
is inconsistent with that advanced by the respondent is sustainable on the
basis of the evidence adduced.
106 In that case, Judge
Bowman held that the taxpayer had known that it was misrepresenting the
payments as management fees or else was reckless as to the legal efficacy of
the arrangement.
. . .
112 As
stated earlier, the respondent proved on a balance of probabilities that the
taxpayer misrepresented his income in his tax returns. The issue then is
whether this omission was made knowingly or under circumstances amounting to
gross negligence. According to Venne, supra, penalties should only be
authorized where there is a high degree of blameworthiness, and in light of the
Farm Business Consultants decision, supra, the benefit of the doubt should be
given to the taxpayer where his conduct is consistent with two viable and
reasonable hypotheses, one justifying the penalty and one not.
[37]
Judge Lamarre went on
to find that there was no gross negligence in that case and consequently
cancelled the penalties.
[38]
Many subsequent
decisions adopt this same view in holding that significant discrepancies between
income reported and net worth are not sufficient in themselves to allow an assessment
for a year that would otherwise be statute-barred or to permit the assessment
of gross negligence penalties. (See,
for example, Boucher v. Canada, 2004 FCA 46, [2004] F.C.J.
No. 169 (QL), at paragraph 5, application for leave to appeal refused [2004] C.S.C.R.
No. 250 (QL); Wajsfeld v. Canada, 2005 TCC 351, [2005] T.C.J.
No. 347 (QL), at paragraphs 56 to 63; Seto v. The Queen, 2007
TCC 489, 2007 DTC 1647, at paragraphs 29 and 30; Continental Steel Ltd.
v. Canada, [1999] T.C.J. No. 802 (QL), at paragraph 89.)
[39]
The weight of evidence
establishes that the auditor did serious work that was completely beyond criticism
and wholly in accordance with good practice, and that applies as well to his
decision to use the net worth method.
[40]
There is no evidence to
support a conclusion that the Minister's actions were arbitrary, disproportionate
or unreasonable. Quite the contrary, the notices of assessment were based on
reliable, even indisputable, information (the purchase of two fishing licences)
that was confirmed by the appellants themselves through the corrections made at
the beginning of the hearing.
[41]
There was an adjustment
to assets that was based on solid, indeed indisputable, facts that were not
challenged and from which it can be concluded that there was income that was
not reported, not through bad faith but essentially through ignorance.
[42]
Often, in assessments
made using the net worth method, the respondent must make a rather arbitrary
determination of certain elements that contributed to the increase in assets; I
refer in particular to cost of living expenses. In the present case, the
parties have agreed on this component.
[43]
The key elements in the
increase in the appellants' financial assets are the two fishing licences that
were acquired. The value of these licences was established in a reliable manner
and was corrected after the relevant documents were obtained. The book value of
one of these licences was determined to be $20,000 whereas the price paid for
it was $10,000. The respondent undertook to make the necessary corrections.
[44]
Being regularly short of
money and living frugally do not necessarily signify low income. If income is
used to acquire capital assets, to purchase various goods, to make RRSP
contributions, etc., such income is no longer available but it is still an
enrichment that is added to the balance sheet or to year-end assets. These
amounts must be added to the income that has to be reported.
[45]
The appellants did not
in any way challenge the value added to their assets except to submit that the
purchase of the licences should have been considered a current expense incurred
for the purpose of earning income. Actually, though, it was a capital expense.
[46]
The evidence submitted
by the appellants is far from justifying vacating the assessments for the 2005
and 2006 taxation years. The Court understands the appellants' explanations,
but they have absolutely nothing to do with the elements upon which the
assessments made for the 2005 and 2006 taxation years were based.
[47]
Moreover, the
appellants did not present any evidence to challenge the validity of the
assessments, aside from insisting that the auditor had no grounds for using the
net worth method. They no doubt believed that the unjustified use of the net
worth method should be sanctioned by the cancellation of the assessment or
assessments made using this method. As for the amounts added to their income,
not only did they not raise any objection, but they confirmed the accuracy of
the amounts in question.
[48]
As a result, I find that
there is a complete lack of evidence bringing into question the validity of the
assessments for the 2005 and 2006 taxation years, which will nevertheless have
to be amended to take into account the corrections made at the beginning of the
hearing, namely: the cost of living is to be reduced by $3,000 for each of the
years in question and the cost of the fishing licence, initially put at
$20,000, must be corrected to $10,000.
Statute-barred period, 2004 taxation year
[49]
The appeal concerns the
2004, 2005 and 2006 taxation years. The 2004 taxation year being statute-barred,
the onus was on the respondent to prove the appellants' neglect and carelessness,
failing which the Court would be obliged to vacate the assessment for that year.
[50]
Did the respondent meet
her burden of proof? The respondent did not submit any evidence to that end
during the hearing. At the beginning of the respondent's argument, I was
particularly interested in this issue and that of the penalties added to the
assessments for each of the years at issue. The respondent's only response and
observation was to state that the discrepancy between reported income and
assessed income was in itself sufficient to meet her burden of proof.
[51]
It is agreed that the
burden of proof to be met in order to make an assessment beyond the period prescribed
is less stringent than that which must be discharged in order to impose a
penalty. In the latter case, the Crown must show, on a balance of
probabilities, that there was wilful default, negligence or wilful blindness
amounting to gross negligence.
[52]
The Crown argued that
the discrepancies observed between the reported income and that calculated
using the net worth method were so significant as to constitute in themselves a
sufficient basis for finding that the Crown had met both burdens of proof. This
could have been so in a case where the facts showed that there was clear gross
negligence, that false or misleading statements were made, or that there was a
complete lack of any plausible explanation provided by the appellants.
[53]
In the present case,
the appellants testified simply and answered all questions without any attempt to
evade a single one. They explained how they operated their business. They did
not challenge the data used by the auditor, who admitted that he had received
the appellants' cooperation. The appellants gave him all the documentation they
had regarding the taxation years in question. They allowed their accountant to
collaborate with the auditor and they signed all the required authorizations to
allow a thorough audit.
[54]
In fact, the appellants'
only complaint regarding the audit was that, under the circumstances, resorting
to the net worth method was not justified. They contended that they had
properly met their obligations by keeping reliable and adequate accounting
records that allowed a conventional or normal audit to be conducted.
[55]
The auditor, for his
part, indicated that he had noted certain shortcomings that were attributable
to the fact that over-the-counter sales were mainly cash transactions. He also
mentioned certain irregular activities in the appellants' various bank accounts
and a significant increase in the appellants' assets that was not consistent
with the reported income.
[56]
The testimony of the
auditor and that of the appellants can easily be reconciled. Indeed, it seems
that the appellants were paying for the fishing licences from their own income.
However, the licences were acquisitions that resulted in an increase in their
assets. Counsel for the appellants maintained that the licences were merely an
expense incurred for the purpose of earning income and had a neutral effect on
the appellants' assets. In other words, the appellants were always firmly
convinced that they were not enriching themselves but were essentially repaying
their debts according to the income generated by the business.
[57]
In support of their
appeals, the appellants essentially argued that there was no reason to use the
net worth method, and therefore the assessments should simply be vacated.
[58]
Recourse to the net
worth method seems fully justified to me in a situation where the documents
provided and the information submitted do not allow the auditor to calculate
the income and expenditures in such a way as to explain the increase in the
value of the assets.
[59]
In the present case,
the appellants had some form of accounting system. They cooperated and testified
simply, clearly and credibly. The evidence did not reveal anything that would establish
gross negligence or bad faith. It did, however, show beyond any doubt that, in relation
to the reported income, the amount of income not reported was significant.
However, the explanation provided regarding the treatment of the expenditures
required for the purchase of the licences is neither far-fetched nor
unreasonable.
[60]
It is not sufficient to
have put in place an accounting system and to have accounting records to avoid
being the subject of a net worth review during a tax audit. There must be
correspondence between the documentary evidence and the taxpayer's assets and
liabilities.
[61]
In the present case,
the auditor noted the existence of discrepancies in the deposits, of a number
of cash transactions, and lastly, of significant assets that the reported
income did not justify. It is not sufficient to have in one's possession
accounting records and all the related documents in order to avoid a
reassessment. The accounting must be complete, but also – and this is
fundamental – reliable, credible and accurate with regard to the increase in
the assets of the person or persons concerned.
[62]
None of the arguments with
respect to vacating the assessments simply on the ground that recourse to the
net worth method was inappropriate or unjustified is admissible. The facts
revealed by the evidence show that use of the net worth method was fully
justified, although the good faith and credibility of the appellants is not in
question.
[63]
As for the penalty, the
respondent did not meet her burden of proof, and therefore, the auditor's
testimony was of no help to the respondent. In fact, the auditor acknowledged that
he had had the appellants' cooperation in the performance of his work. He drew
the necessary conclusions regarding the nature of the property acquired, namely
the two fishing licences.
[64]
For all these reasons,
the appellants' appeals are allowed in part and the two files will be referred
back to the Canada Revenue Agency for reassessment with respect to the 2005 and
2006 taxation years on the basis that the expenses attributed to the appellants'
cost of living have been reduced by $3,000 for each of those years and that the
amount paid for one of the fishing licences was not $20,000 but rather $10,000.
[65]
The penalties relating
to the 2005 and 2006 assessments are cancelled. In all other regards, these
assessments remain unchanged. As for 2004, the assessment is vacated and the related
penalty cancelled.
[66]
There will be no award of
costs.
Signed at Montreal, Quebec, this 14th day of May 2013.
"Alain Tardif"
Translation
certified true
on this 29th day of July 2013.
Erich Klein,
Revisor
Email this Content