[OFFICIAL ENGLISH TRANSLATION]
2000-1181(IT)I
BETWEEN:
HUBERT MORNEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 28, 2001, at Chicoutimi, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Agent for the Appellant: Jean-Jacques Angers
Counsel for the Respondent: Alain Gareau
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 27th day of July 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 13th day of February 2003.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20010727
Docket: 2000-1181(IT)I
BETWEEN:
HUBERT MORNEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal for the 1995, 1996 and 1997 taxation years. The assessments were made using the "net worth" method.
[2] The appeal also concerns the penalties added to the assessments.
[3] The appellant-who bore the burden of proof, except as regards the penalties-and his wife, Christine Tremblay, testified in support of the appeal.
[4] Ms. Tremblay, who was responsible for the basic running of the business, was the main witness. The appellant essentially confirmed her testimony, adding a few details and qualifying some aspects, especially as regards the price paid for a truck purchased in December 1996 and for a power shovel also purchased in 1996.
[5] Although she was obviously well prepared, Ms. Tremblay did not give very precise testimony; a number of her answers and comments were quite confused and vague.
[6] Generally speaking, the evidence focused on three areas in particular.
[7] First, Ms. Tremblay explained that the family residence was transferred to her in 1984 or 1986, following the creation of the family business, to shelter it from potential financial problems.
[8] As she was the owner of the residence, Ms. Tremblay argued that the rental income, which amounted to a little more than $4,000 for each year at issue, should be attributed to her and not her husband; however, the evidence on this question showed that the appellant reported the income as his own in his tax returns.
[9] Second, the appellant's spouse described the space available in the family residence. She stated that the business occupied or had the use of half of the interior of the house, since it occupied one room for its office, part of the kitchen and a large part of the basement; the business also occupied part of the yard, in addition to the shed, to store and house the equipment and machinery it needed. On the question of space sharing, the appellant's wife said that the business used 50 percent of the surface area, and she set the rental value of such use at $500 a month.
[10] Finally, Ms. Tremblay said that the family had a very modest lifestyle and a very simple social life that was not very financially demanding; thus, she said, all they were concerned about was protecting the property they acquired, instilling good values into the members of the family and, lastly, earning an honest living for the family.
[11] These are the fundamental points that emerged from Ms. Tremblay's testimony. The appellant basically confirmed everything when he testified.
[12] However, the cross-examination of the appellant and his wife brought out a number of facts that go against the appellant's position. First of all, it was established that $5,000 was allocated for food expenses for five people, including three young people in their twenties. To argue that this was an inappropriate or excessive amount does not seem very credible or plausible.
[13] The acknowledgement and admission that both the truck and the power shovel were paid for in full (principal, taxes, fees and interest) over a very short period of time, namely two years for the truck, which cost $9,500 plus taxes and interest, and three years for the power shovel, which cost $35,000 plus taxes and interest, totally discredit the position taken by the appellant.
[14] In addition to discrediting the appellant's evidence, that fact alone makes it possible to understand why Denise Tremblay, the business's accountant, wrote, after the review, that she had been instructed to accept the proposed assessment. It would be appropriate to reproduce here the content of her letter (Exhibit A-1):
To: Kaven Landry
Business File Auditor, Revenue Canada
Date: March 5, 1999
. . .
Dear Mr. Landry:
My client, Hubert Morneau, the sole proprietor of Morneau Excavation enr., has asked me to advise you that he has read your proposed assessment of March 1, 1999, and that he accepts it, except as regards the food expenses, which according to him are obviously lower. However, he admits that he is not able to prove this.
Mr. Morneau and his wife are also sending you a letter in which they ask you to show leniency in applying the penalty you talked to them about.
For my part, I request that you make the assessment as quickly as possible so that I can go ahead, using the corrected T2S(8) forms, with the filing of the 1998 tax returns. I also request that you be meticulous in allocating the additional CCA you allow so that it actually cancels the taxes payable.
I trust you will find this satisfactory. Feel free to contact me, however, should you need any further information.
Denise Tremblay
Samson Bélair/Deloitte & Touche, General Partnership
Chartered Accountants
[15] In itself, the content of that letter signed by the business's accountant is not necessarily relevant to the validity of the assessment. However, that content became rather embarrassing when the appellant himself admitted that he had accepted the proposed assessment and instructed his accountant accordingly, thinking at the time that the monetary consequences would not be as serious as they ended up being.
[16] Repudiating such instructions and refusing to live with the consequences of those instructions because the cost resulting from accepting the figures was higher than expected cannot be validly done, especially since the accountant must have known the consequences of that acceptance.
[17] The evidence adduced by the respondent-who bore the burden of proof as regards the penalties assessed-also made it possible to better understand the content of and reason for the accountant's letter.
[18] That evidence showed that the auditors' work on both the audit and the subsequent review was done judiciously and above all with great generosity. Indeed, Étienne Sabourin, the chartered accountant who was responsible for the file at the review stage, said that he had suggested to the appellant that he claim capital cost allowance in order to reduce his tax burden.
[19] Although the appellant's wife indicated that she was traumatized by the length of the audit and by what the auditor said, it appears from the evidence that the audit, which lasted three weeks, was conducted in an acceptable manner and in accordance with good practice.
[20] The evidence showed that the auditors were lenient and generous in making certain allocations, inter alia as regards the determination of the basis used for the calculation of the penalties; such was the case with respect to the personal expenses paid by the business. Moreover, it was admitted and acknowledged that the business occupied or used a surface area equivalent to 30 percent of the family property, which in itself was realistic, reasonable and consistent with the evidence adduced in this Court.
[21] It appears that the figures and data recorded were reasonable and always compiled in the appellant's favour, which is why I think that the auditors were sympathetic to the appellant rather than vindictive or negative toward him.
[22] Moreover, the Court could see that the appellant and his wife were obviously good, hardworking people who made every effort to earn an honest living. On the other hand, the business's accounting was inadequate, and income was used to pay debts as quickly as possible (witness the truck and power shovel purchases).
[23] Administrative confusion marked the business's operations; its income was used for personal expenses, which is no doubt why the auditors had to stay so long to conduct the audit. The net worth method had to be used because the business's accounting did not provide transparency, consistency and plausibility.
[24] The various findings resulting from the net worth method are determinative and could not be discredited. Suffice it to note that the differences found meant that the appellant, with the income he reported, could not even afford the minimal expenses that he claimed he had. In other words, the appellant's assertions were mathematically impossible and implausible, which is why his logically untenable arguments cannot be accepted.
[25] As regards the penalties, I admit that I could have understood or accepted certain explanations if the unreported amounts had been minor, but the evidence showed that this was hardly the case. The amounts were in fact substantial, even though the methods used to determine them were generous. However, the appellant and his wife believed, and no doubt still believe, that taxable income is income of which a person has the use.
[26] The fact that income that can be identified through adequate accounting is not in one's possession does not mean that it is not real. Reporting income that corresponds to less than half of actual income is, beyond a shadow of a doubt, gross negligence under the Income Tax Act ("the Act"). Obviously, this may seem difficult to understand if one sincerely believes that one has not received that income. In this case, the appellant reported an amount of about $35,000 as his total income for the three-year period in question.
[27] However, the audit showed decisively, and thus on a substantial balance of probabilities, that the appellant failed to report about $50,000, that is, more than 140 percent of the income he reported for the same period, which in itself constitutes very gross negligence that is more than sufficient to justify the assessment against the appellant of the penalties provided for by the Act.
[28] The appeal is therefore dismissed. In the circumstances, the penalties assessed were fully justified.
Signed at Ottawa, Canada, this 27th day of July 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 13th day of February 2003.
Erich Klein, Revisor