Tax Court of Canada Judgments

Date: 19990507

Docket: 98-1132-GST-I

BETWEEN:

ENTREPRENEUR PEINTRE J.L. INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Tardif, J.T.C.C.

[1] This is an appeal from a Goods and Services Tax (“GST”) assessment dated May 9, 1997, that was made under the Excise Tax Act (“the Act”) for the period from January 1, 1993, to December 31, 1995.

[2] Jean Labranche, the directing mind of the appellant company, began by tracing the history of his career. During the years at issue, his company was in the painting business. Over the years, there were some changes with respect to the shareholders.

[3] Initially, Johanne Picard, Mr. Labranche’s spouse, was a shareholder and was involved in managing the business. When she withdrew, one or two other shareholders (depending on the period involved) took over, although Ms. Picard still concerned herself with the efficient operation of the business.

[4] Mr. Labranche, who is diabetic, explained how he came to work in the painting business. He stressed that the business had always performed commercial and industrial contracts, since residential work was not sought after as a profitable area of business. Indeed he underlined this by giving concrete examples to show the total lack of interest in residential contracts.

[5] The performance of exclusively commercial painting work was quite clearly demonstrated until Ms. Picard stated just as clearly that the business did its painting work rather in private homes until it obtained a contractor’s licence from the Régie du bâtiment du Québec, upon which its residential work declined as it took on more commercial work. She never suggested that the business’s clientele was exclusively commercial.

[6] The interest in commercial rather than residential contracts is important, since Mr. Labranche argued that the commercial contracts were carried out following tender calls and that he was paid by cheque, which, he said, left no room for clandestine work.

[7] The issue of clandestine work forms the basis for the assessments, since that source of hidden income is, in the respondent’s submission, the only reasonable explanation for the differences found with respect to the years at issue.

[8] A number of times, Mr. Labranche stated unequivocally that he had never done clandestine work.

[9] To support the validity of the assessments for the years at issue, the respondent relied on the facts alleged in the Reply to the Notice of Appeal, and especially the following paragraphs:

[TRANSLATION]

4. During this period, Jean Labranche was the directing mind, and in 1995 he became the appellant’s sole shareholder;

5. After looking at the bank deposits and MasterCard credit card payments, the auditor found that there were unexplained differences justifying unreported business income of $8,622.00, $17,184.00 and $22,106.00 for 1993, 1994 and 1995 respectively;

6. Moreover, the appellant cannot argue that those amounts are accounted for by employees’ cheques being cashed, since its total wage expenditure minus the salary paid to Jean Labranche, as indicated in its financial statements, was as follows for each of those years:

7. The auditor therefore calculated the tax (GST) at the rate of seven percent on the said additional unreported income from the appellant’s painting business, for a total of $3,353.84 plus the applicable interest and penalties;

[10] The respondent concluded that income of $47,912 from the operation of the business had not been reported; she therefore assessed the appellant on the difference in question for 1993, 1994 and 1995.

[11] The burden of proof was on Mr. Labranche. He had to prove, on the balance of evidence, the validity of his argument that he had never done work subject to the Goods and Services Tax; he also had to show that the applicable taxes had been collected and remitted. Based on those two facts, he had to justify the differences observed by the respondent by giving plausible, probable and reasonable explanations.

[12] The best way of proving this would have been to adduce extensive documentary evidence showing the consistency and accuracy of the financial data. The exceptional quality of the testimony of one or more witnesses could perhaps have minimized certain omissions and made up for certain flaws or weaknesses attributable to the passing of time or to the inexperience of the individuals subject to the obligations set out in the Act.

[13] In this regard, I consider it important to point out and stress the obligation that Mr. Labranche had to have such documentation in his possession in order to account for his management of government funds. As an agent, he had to collect the tax and remit it to the respondent in accordance with the procedures expressly set out in the Act. In other words, he had to account for his management by showing that all of the taxes had been collected and remitted in accordance with the Act’s provisions.

[14] Since he could not adduce such evidence for reasons that will be examined below, Mr. Labranche chose to rely on indirect, circumstantial evidence, arguing that he had spent all of his time doing commercial work that did not lend itself to being paid under the table. This was indirect evidence that had to be very persuasive; such evidence also had to have an objective basis.

[15] Accordingly, it was absolutely essential that this evidence be unassailable for it to have a modicum of relevance and credibility. Yet Johanne Picard, who is perfectly well aware of the company’s activities, testified that the business run by Mr. Labranche did not shift to commercial work to any significant extent until after it obtained a contractor’s licence.

[16] Her testimony did not show that the business did exclusively commercial work, contrary to what Mr. Labranche had said in his testimony, given while she was not present. Ms. Picard thus repudiated her spouse’s testimony on this aspect of the case, which he himself presented as being a strategic one; he wanted and chose to base his arguments on the fact that he was not interested in doing work that would create an opportunity to be paid under the table. According to the appellant, such an opportunity existed only with residential work.

[17] WHAT ABOUT THE OTHER COMPONENTS OF THE APPELLANT’S EVIDENCE?

[18] Mr. Labranche maintained that the company had been audited in 1995. He said that the auditor, whose name he did not remember, told him that he had been negligent and careless with his papers. He said that he understood from what the auditor had said that there was no longer anything of use in his accounting records. He therefore decided to change accountants and to store all his muddled papers in the basement of his home. He said that a puppy then ate the papers and that he subsequently decided to get rid of what was left.

[19] His spouse described the same events differently. Although she said that the puppy damaged some of the papers, she never indicated that this made them unusable. Rather, she explained the fact that the documents were disposed of by referring to her spouse’s moods. She said that he had become worried, traumatized and bitter as a result of the audit; in his darkest period, he had decided to throw everything out.

[20] The Court does not accept the explanation involving the puppy; what is more, I consider it to be a pure fabrication resulting from a fertile imagination, likely based on a commonplace incident in which their puppy probably cut its teeth on Mr. Labranche’s briefcase and a few other items.

[21] In any event, this in no way exonerates the appellant from its obligation to have accounts in its possession as well as the vouchers that would enable those accounts to be audited at any time. It may happen that a taxpayer, for any number of reasons, is unable to provide such documentary evidence. It may also happen that the way of doing things, the accounting system or the documentation is deficient, inadequate or incomplete. In every such case, the taxpayer, as an agent, must alone bear the consequences of his or her negligence and carelessness, although in some situations there may be mitigating circumstances beyond the control of the person who assumes responsibility.

[22] Each case turns on its own facts and must be assessed on the basis of the events that generally make it possible to identify the taxpayer’s intention and especially his or her good faith.

[23] In the case at bar, Mr. Labranche, by his own admission, acted negligently and, what is even more serious, totally irresponsibly by destroying all the documentation concerning matters for which he was accountable. As a result, he alone must bear the consequences. The explanations given in no way reduce the seriousness of his breach. What is more, the bizarre explanations concerning the circumstances surrounding the destruction of the documentation basically demonstrate his bad faith. He could and should have kept at least certain items, documents or papers to back up what he said and give his arguments a little plausibility. He chose to prove what he was required to prove solely through his own testimony and that of his spouse.

[24] The other explanations with respect to the differences that were found are not much more plausible; the financial participation of his spouse, whose involvement was not revealed until the day of the hearing, is not very convincing. Stated intuitions about possible advances she allegedly made are certainly not such as to improve the mediocre quality of this part of the evidence.

[25] On the matter of the gifts from his father, the amount of which coincided with the yearly cost of the medication he had to take to counter the effects of his disease—that is, about $3,000 a year—I understand that direct evidence was impossible because of the death of Mr. Labranche’s father. However, since he knew of the respondent’s intentions, it would no doubt have been possible, even simple, to obtain at least a sworn statement from the donor.

[26] Finally, the sale of two pieces of furniture is perhaps the most credible or plausible indicated source of income; once again, however, the evidence was not very persuasive. Mr. Labranche and his spouse did not recall what had become of the schedule to the notarized agreement, and the amounts indicated were, by their own admission, quite approximate.

[27] Besides all this evidence calling for the outright rejection of Mr. Labranche’s explanations, there are also the total payroll figures for the years at issue. According to those figures, Mr. Labranche worked alone throughout 1994 except for about 150 hours; thus, for that year, his employment income was $12,376 out of a total payroll of $15,554, which leaves a difference of $3,178 for the hiring of employees, of whom there were between one and three. That basically mathematical reality shows irrefutably that the company had third persons working for it for only about 150 hours.

[28] In itself, this finding is in no way conclusive. However, it is certainly an indication that improves the respondent’s evidence and totally discredits the appellant’s circumstantial and very indirect evidence, which is already of very poor quality.

[29] There is nothing scientific about the respondent’s evidence. She proceeded in a reasonable manner given the available facts and the circumstances. It was not enough to dispute the validity of the assessment and say that the differences could no doubt be explained any number of ways. Mr. Labranche chose to base everything on his credibility alone. In this regard, he failed spectacularly.

[30] The Court has no reason to discredit the audit work or to conclude that there were mistakes in it that could invalidate its results. Having acted as he did, Mr. Labranche has only himself to blame.

[31] For all these reasons, the appeal is dismissed and the assessment is confirmed.

Signed at Ottawa, Canada, this 7th day of May 1999.

“Alain Tardif”

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 28th day of February 2000.

Erich Klein, Revisor