Date: 19990119
Docket: 97-767-IT-I
BETWEEN:
RICHARD CORRIVEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
(delivered orally at the close of the hearing on July 3, 1998, at Sherbrooke, Quebec)
Archambault, J.T.C.C.
[1] Mr. Corriveau is contesting notices of assessment for the 1988, 1989 and 1990 taxation years. In making the assessments, the Minister of National Revenue (Minister) used the net worth method, adding to Mr. Corriveau’s income unreported income of $18,422 in 1988, $19,201 in 1989 and $12,571 in 1990. The 1988 assessment was made beyond the normal assessment period. In addition, the Minister imposed penalties for each of the three taxation years in question.
[2] Mr. Corriveau argued that the Minister made some mistakes in calculating his net worth, inter alia with respect to the calculation of his personal expenses and as regards a $26,000 debt owed to a Mr. Poulin, which the Minister did not take into account in calculating Mr. Corriveau’s net worth.
Circumstances surrounding the making of the assessments
[3] Mr. Corriveau’s assessments were issued by the Minister’s special investigations service after information was obtained from the Sûreté du Québec indicating that Mr. Corriveau had been charged with theft and heroin trafficking. On May 10, 1991, Mr. Corriveau was asked to provide balance sheets and statements of income and personal expenses for 1987 to 1990. His agent, an accountant, provided the requested information on June 4, 1991.
[4] The Minister’s auditor gave the following explanation for the choice of the net worth method. He noted the low income reported by Mr. Corriveau: $6,708 in 1988, $24,988 in 1989 and $12,991 in 1990. He noted that there were unexplained bank deposits: a total of $19,661 for 1988 and $8,038 for 1990. There were also over a period of three months cash deposits in small denominations of $20, $50 and $100 totalling at least $10,000. The auditor further noted that Mr. Corriveau had no accounting records for some rental properties. Nor did the taxpayer have any vouchers with respect to the operation of a business called Bar 300.
Mistakes in calculating net worth
[5] Mr. Corriveau has the burden of proving that the Minister made mistakes in calculating his additional income using the net worth method. In Dowling v. Canada, [1996] T.C.J. No. 301, my colleague Judge Lamarre stated this rule as follows:
[para7] The appellant has the burden of showing that the basis of the Minister’s assessment is wrong or that there are errors in certain items of the assessments. In the present case, the Minister used the net worth method. Therefore, when a taxpayer is faced with a reassessment based on a net worth calculation, he can either try to present evidence enabling the Court to determine his real net income or he can seek to prove that the net worth assessment is wrong.
Debt of $26,000
[6] Daniel Poulin testified at Mr. Corriveau’s request. He is a childhood friend of Mr. Corriveau's and a native Quebecker. He was living in Switzerland during the years in question. He played hockey there from 1982 to 1990 and is now working as a hockey coach. He stated that he was provided with free housing in Switzerland and that his after-tax salary was between $75,000 US (in 1988) and $95,000 US (in 1990).
[7] Mr. Poulin spent about three months in Quebec every summer during the relevant years. He brought with him from Switzerland substantial liquid assets, specifically some $20,000 in cash, and he also used his credit card in Quebec to make purchases and obtain advances. He said that he did things this way because he feared being liable for tax in Canada.
[8] Mr. Poulin stated that, since Mr. Corriveau was having serious financial problems, he loaned him — through advances ranging from $50 to $1,000 — a total of $10,000 in 1988 and 1989 and $6,000 in 1990. Mr. Poulin said that this $26,000 loan was repaid as follows: $17,000 on June 7, 1991, $6,000 on June 13, 1991, and $3,000 on July 4, 1991. These payments were made by means of three certified cheques, which Mr. Poulin apparently cashed at Mr. Corriveau’s bank.
[9] Based on the evidence I have heard, it is my view that Mr. Corriveau has not discharged the burden that rested on him of proving that there really was a $26,000 loan. He did not file any documentary evidence with the Court: no note, no document that could corroborate either the existence or the repayment of a loan. There is no documentary evidence of amounts credited or debited to a bank account of Mr. Corriveau's or Mr. Poulin's either at the time the loan was made or at the time it was repaid.
[10] The only evidence that the loan existed is the testimony of Mr. Poulin and Mr. Corriveau. However, there are inconsistencies in that testimony. First of all, Mr. Corriveau did not reveal that he was having serious financial problems when Mr. Poulin loaned him the money. He said that he used Mr. Poulin’s money to pay his current expenses. They were not specific or substantial expenses. The documents filed in Court show bank deposits of $7,013 in 1987, $26,657 in 1988, $42,736 in 1989 and $46,272 in 1990.
[11] I have trouble understanding why Mr. Corriveau needed advances from his friend to meet his day-to-day needs. The balance sheets filed show that the value of Mr. Corriveau’s real estate investments increased during the years in question: it went from$57,050 in 1987 to $66,050 in 1988, $120,950 in 1989 and $264,250 in 1990. Over the same period of time, his mortgage debts went from $23,567 in 1987 to $22,593 in 1988, $74,470 in 1989 and $182,111 in 1990.
[12] The net worth calculated by the Minister shows an increase of $17,134 in 1988 compared with 1987, $35,596 in 1989 compared with 1988 and $15,051 in 1990 compared with 1989. If Mr. Poulin’s alleged loan is subtracted from that net worth, the increases would be $7,134, $35,596 and $19,051 for the 1988, 1989 and 1990 taxation years respectively.
[13] I find it rather surprising that a person would lend so much money without interest and without any note to a friend who has so many term deposits. I also find it surprising that a person would borrow so much money from a friend to pay the grocery bill, so to speak, when that person has so much money in the bank.
[14] I must also point out that the repayments Mr. Corriveau claims to have made would have occurred during the period when the Minister requested balance sheets. Mr. Poulin says that he destroyed the document in which he had recorded the amount of his loans, but how is it that Mr. Corriveau and his accountant did not ask Mr. Poulin to keep that document, which could have been important in corroborating Mr. Corriveau's assertions.
[15] As I stated above, there is no trace of any repayment in Mr. Poulin’s bank accounts. Why would he have cashed the certified cheques for $26,000 when, as he said, he left Switzerland with substantial liquid assets? Mr. Poulin claimed that he needed a great deal of money that year because he had an eye operation; however, he did not provide any details about that operation, either as to where he had it or as to whether he had to lay out a significant amount of money to pay his medical expenses. He said that he needed money in Switzerland, yet he cashed the cheques in Canada.
[16] I also find it surprising that Mr. Corriveau did not testify during the first phase of the trial in order to confirm that Mr. Poulin had loaned him money. Mr. Corriveau did not testify until I gave his agent permission to reopen the evidence for the purposes of filing the balance sheet that he had prepared based on the information provided by Mr. Corriveau. During his examination, Mr. Corriveau did not say anything about the expenses that appear on the balance sheets.
[17] In conclusion, I am not satisfied on a balance of probabilities that Mr. Poulin loaned Mr. Corriveau $26,000.
Personal expenses
[18] The Minister’s auditor determined the amount of personal expenses partly on the basis of the statements of income and personal expenses filed by Mr. Corriveau and partly by using Statistics Canada data, inter alia as regards the amount of expenses for food, health care, personal care (for example, hairdressing expenses), housekeeping, clothing, life insurance, donations and gifts, newspapers, alcoholic beverages, etc.
[19] Mr. Corriveau did not testify to prove his personal expenses; he merely filed the balance sheet prepared by his accountant. The accountant maintained that the calculation of personal expenses by the Minister’s auditor should be excluded because it was based essentially on statistics.
[20] However, a careful review of the calculations by the Minister’s auditor shows that he used the same figures as Mr. Corriveau’s accountant for a number of items of personal expenses, including expenses for housing, use of a car and recreation. The main difference between the Minister’s figures and Mr. Corriveau’s figures can be explained by the fact that the statement of personal expenses drawn up by Mr. Corriveau does not contain some of the expense items that appear in the statement prepared by the Minister, including health care, personal care, housekeeping, clothing, life insurance, donations and gifts, newspapers and alcoholic beverages. Mr. Corriveau, I repeat, never testified to confirm that he did not incur such expenses or, if he did incur them, to prove their amount.
[21] I am therefore not satisfied that the Minister made any mistakes in calculating Mr. Corriveau’s personal expenses.
Assessment beyond the normal assessment period for 1988 and penalties
[22] The respondent acknowledged that the 1988 assessment was made beyond the normal assessment period. In the case at bar, she had the burden of proving that she was entitled to make a reassessment for the 1988 taxation year and to impose penalties for the three taxation years at issue.
[23] In Dowling, supra, my colleague Judge Lamarre commented on subsections 152(4) and (5) of the Income Tax Act, which authorize the Minister to make an assessment beyond the normal assessment period. Judge Lamarre stated the following at paragraphs 76 and 77:
[para76] 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.
[para77] 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.
[24] In light of the whole of the evidence, it is my view that the Minister has not discharged the burden of proof that rested on him. As Judge Lamarre acknowledged, the burden on the Minister is a heavy one; it is all the more so when a taxpayer explains the discrepancy between his reported income and his increase in net worth by pointing to the existence of a loan, which is a non-taxable source.
[25] There remains the issue of the penalties for the 1989 and 1990 taxation years. The respondent argued that they should be maintained for those years. They were imposed under subsection 163(2) of the Act, which reads as follows:
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 . . . .
[26] Subsection 163(3) of the Act specifies that the burden of proof is on the Minister:
Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.
Since the Minister has the burden of establishing the facts justifying the assessment of penalties, he must prove: (1) that the taxpayer made a false statement or omission in a return, and (2) that the false statement or omission was made knowingly or under circumstances amounting to gross negligence.
[27] In Dowling, at paragraphs 100 et seq., my colleague Judge Lamarre stated the following concerning the burden that lies on the respondent where an assessment is based on net worth:
[para100] 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 DTC 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.
[para101] 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.
[para102] 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].
[28] In my opinion, the respondent’s proof of Mr. Corriveau’s gross negligence is based more on the evidence of the size of the discrepancy between his reported income and his increase in net worth than on any evidence that the false statement made in Mr. Corriveau’s return resulted from gross negligence. I believe that the evidence is not sufficient to establish a connection between the fact that Mr. Corriveau had no accounting records for his rental properties and the false statement in his return.
[29] The same is true of the lack of vouchers with respect to the operation of Bar 300. The evidence did not provide any details on its operation. Was it in fact operating throughout the relevant period? We do not know.
[30] It is also possible that the unreported amounts are from unlawful activities, but there is no evidence that Mr. Corriveau engaged in or was convicted of such activities.
[31] If I cannot be specific as to Mr. Corriveau’s gross negligence, I cannot find that the conditions for the application of section 163 of the Act have been met.
[32] For these reasons, Mr. Corriveau’s appeals are allowed. The assessment for the 1998 taxation year is vacated. The assessments for the 1989 and 1990 taxation years are referred back to the Minister for reconsideration and reassessment on the basis that the penalties must be deleted.
Signed at Ottawa, Canada, this 19th day of January 1999.
“Pierre Archambault”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 18th day of March 1999.
Erich Klein, Revisor