[OFFICIAL ENGLISH TRANSLATION]
98-1988(IT)G
BETWEEN:
RÉGIS SIROIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 8, 2002, at Rivière-du-Loup, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the Appellant: Marion Pelletier
Counsel for the Respondent: Michel Lamarre
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1992, 1993, 1994 and 1995 taxation years is dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 7th day of June 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 26th day of August 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020607
Docket: 98-1988(IT)G
BETWEEN:
RÉGIS SIROIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the 1992, 1993, 1994 and 1995 taxation years.
[2] Only the appellant testified in support of his appeal. He stated that he had completed Grade 6 and had been obliged to work at various jobs to earn his living. In particular, he drove trucks, worked as a mechanic and did odd jobs, while at the same time he bought and sold various assets.
[3] At one point, he purchased an outfitting business on the North Shore along with four airplanes, which he used to transport some of his clients to the site of the outfitting business. The weather was not always favourable for flying, which made it difficult to reach the site and this had direct and significant effects on the viability of that business. As a result, the appellant sold it along with some of the airplanes.
[4] The appellant made a profit, $50,000 of which he used to purchase the outfitting business Le Chasseur Inc., located in the region where he lived.
[5] Since this business was located near the appellant's home, it was easier for him to be involved in the business and he could count on a larger and more reliable client base.
[6] In order to complete the transaction, the appellant also had to borrow $100,000 from the credit union, a loan for which his spouse acted as guarantor.
[7] After providing an introductory background, the appellant described the premises of the outfitting business ''Le Chasseur Inc.'' He explained in great detail how he purchased two mobile homes. The circumstances surrounding the purchase of the mobile homes were explained and described from every angle.
[8] The appellant stated that he was obliged to change his original plan of selling the mobile homes at a very small profit. After the supposed purchaser lost interest, the appellant then decided to make the mobile homes part of the inn being built at a strategic location on the site of the outfitting business.
[9] A number of the appellant's explanations concerning the mobile homes were unclear. In particular, he stated that he purchased the mobile homes for over $20,000 including transportation costs and intended to sell them for a consideration of $20,000. Later in his testimony, he stated that he could easily have made a profit of tens of thousands of dollars by selling the mobile homes in Rimouski. In justifying the incorporation of the mobile homes to the inn, the appellant claimed that this operation was very profitable. If it was so profitable to use the mobile homes in the construction of the inn, why did the appellant want to sell the mobile homes for $20,000 after purchasing them? That question remained unanswered.
[10] Throughout his testimony, the appellant constantly referred to factors that were irrelevant with respect to the merits of his appeal. For example, he repeated that he was hardworking, brave, honest and responsible. He repeatedly stated and strongly emphasized that he had always fully assumed his tax liabilities.
[11] Those statements might have been helpful and somewhat relevant if they had been complementary or had supplemented appropriate evidence.
[12] Generally and specifically concerning the most important points of his appeal, the appellant adduced no direct evidence; essentially, he provided explanations that were not always coherent and were based for the most part on assumptions such as the following:
[translation]
''The outfitting business couldn't afford that; it never had anything more than what it took to keep it running;''
''Sure, I had sold a gizmo;''
''I had income that the Department accepted without question; why is it not the same for the expenses?''
[13] The appellant adduced no credible, plausible evidence concerning the expenses claimed or deducted from his declared income. Such evidence was vital, particularly since, given the activities of the various sets of assets for which he was responsible, the appellant might very well have claimed the same expenses twice.
[14] This potential confusion of expenses is moreover made quite clear in paragraphs 26, 27 and 28 of the appellant's Notice of Appeal.
[translation]
26. Since the appellant was, at all relevant times, the single and sole shareholder and officer of the outfitting business Le Chasseur Inc., this business was, in fact, the appellant's alter ego.
27. In this situation, it was normal for the appellant to pay his business's operating costs directly when the business could not afford to do so, or when circumstances obliged him to assume responsibility personally on behalf of his business.
28. To all intents and purposes, there were no significant tax repercussions regardless of whether the appellant or his outfitting business assumed responsibility for paying expenses.
[15] The balance of the evidence showed that the appellant had deliberately chosen to organize his affairs in a confused manner so that no one could make sense of them. He also refused to cooperate during the audit. At the hearing, he provided blatantly implausible and incoherent explanations that were meant to deceive.
[16] Instead of providing vouchers as evidence of his purchases (expenses of all kinds for himself), the appellant reduced his income by an amount equivalent to the expenses that were disallowed.
[17] The appellant never provided tangible evidence of the expenses that were claimed and disallowed; he even argued that if the respondent accepted the income, she had no reason to question the expenses. Instead of providing evidence of the expenses deducted from his declared income, he filed an amended return in which he reduced his income by an amount equivalent to the expenses that were disallowed.
[18] In support of his appeal, of which he had the burden of proof, the appellant adduced no direct, substantial, documented evidence; instead, his evidence was circumstantial and made up of explanations such as the following:
''Could be;''
''We arranged it so that it would work out;''
''You need income to have expenses;''
''It's Greek to me;''
''We needed an invoice;''
''I needed that expense;''
''I was paying an accountant.''
[19] Taken as a whole, the appellant's testimony showed that he was not as resourceless or inexperienced as he wished to indicate. On the contrary, he was a shrewd, crafty, and very canny businessperson.
[20] In terms of accounting, the appellant simply had a notebook in which he made jottings. At the end of the year, he tore out the relevant pages and gave them to his accountant so that the accountant could prepare the appellant's income tax returns.
[21] For the outfitting business, to which he made constant reference, the appellant stated that he had set up a model accounting system. The ''director's advance'' account, with its many entries, is a very concrete and important indication of the significance the appellant attached to those accounting entries.
[22] Why were the appellant's personal affairs in a complete and incomprehensible mess when there was an acceptable accounting system for the outfitting business? That question was never answered.
[23] For the appellant's personal affairs, the accounting information was so deficient, inadequate and incomplete that even the accountant, Claude Lavigne, who obviously did not testify, apparently advised the auditor to proceed using the net worth method, and indeed made the following statements set out in Exhibit I-2, ''Statement of Facts and Reasons for Objection'', dated August 5, 1997.
[translation]
...
Statement of Facts and Reasons for Objection
1992 Taxation Year
The department's representative considered a total of $40,714.77 to be appropriation of funds whereas those disbursements are expenses incurred for the outfitting business Le Chasseur Inc. when the inn was built. An amount of $20,714.77 is supported by vouchers that we consider to be adequate. The cheque for $20,000 issued by the outfitting business Le Chasseur Inc. to Benoit Dupont has to do with the purchase of two mobile homes previously purchased from Régis Sirois.
As a result, we object that these amounts be considered as appropriation of funds.
...
Statement of Facts and Reasons for Objection
1993 Taxation Year
Régis Sirois' net business income was computed on the basis of income and expenses for the year ended December 31, 1991, for which year we had vouchers as evidence of the figures set out in the statement of income and expenses. Since no accounts were kept by Régis Sirois for his business operations, the income for the 1992 to 1995 taxation years has been estimated, as were the expenses, by taking into consideration net income, which is closely related to Mr. Sirois' cost of living.
We therefore object to Revenue Canada's disallowing only the expenses not supported by vouchers given that the income was not supported by vouchers either.
We also object that an amount of $15,014.56 be considered appropriation of funds since, the cheques for fishing and hunting reservations amounting to $4,000 at the very most, the outfitting business Le Chasseur Inc. cannot have had this income.
We consider that this amount is included in Régis Sirois' 1993 income totalling $43,126, and that it cannot in any way be considered income earned by the outfitting business Le Chasseur Inc.
...
Statement of Facts and Reasons for Objection
1994 Taxation Year
Régis Sirois' net business income was computed on the basis of income and expenses for the year ended December 31, 1991, for which year we had vouchers as evidence of the figures set out in the statement of income and expenses. Since no accounts were kept by Régis Sirois for his business operations, the income for the 1992 to 1995 taxation years has been estimated as were the expenses, by taking into consideration net income, which is closely related to Mr. Sirois' cost of living.
We therefore object to Revenue Canada's disallowing only the expenses not supported by vouchers given that the income was not supported by vouchers either.
...
Statement of Facts and Reasons for Objection
1995 Taxation Year
Régis Sirois' net business income was computed on the basis of income and expenses for the year ended December 31, 1991, for which year we had vouchers as evidence of the figures set out in the statement of income and expenses. Since no accounts were kept by Régis Sirois for his business operations, the income for the 1992 to 1995 taxation years has been estimated as were the expenses, by taking into consideration net income, which is closely related to Mr. Sirois' cost of living.
We therefore object to Revenue Canada's disallowing only the expenses not supported by vouchers given that the income was not supported by vouchers either.
We also object that the expenses incurred by the outfitting business Le Chasseur Inc. for the rental of the Ford 4 x 4 be considered appropriation of funds since that vehicle was needed for the company's business operations. It was used to transport goods (including construction materials, food, gasoline, and a snowmobile) and to patrol an area of over 200 square kilometres.
...
[24] When asked why and how he was unable to adduce appropriate documentary evidence in support of his statements, the appellant answered that he had lost a box of relevant documents as a result of flooding in his home basement.
[25] The appellant was repeatedly unable to explain the source of the funds used; he claimed that the funds might have come from one of his five loans or from his mother, spouse or other family members, but he still did not provide appropriate documentary evidence in support of these statements.
[26] How did the appellant obtain a $100,000 loan from a credit union to purchase a business that was losing money when he had no stable, regular employment? He did so because his spouse had a good job, a garage, and acted as guarantor.
[27] The appellant regularly referred to points that he had never raised or set out at the meetings during the audit, although he considered these points decisive at the hearing. I refer in particular to the appellant's explanations as to why he requested cooperation from a certain Dupont in obtaining a document that did not reflect reality. With respect to one advance to the company, he admitted failing to state the corresponding amount as income of the business, which he himself had declared to be inoperative. He refused to hand over to the auditor the log of his airplane's flying time in order that she examine it. He gave no explanation or valid evidence to support expenses that were nevertheless quite substantial in relation to income. In the appellant's opinion, the respondent did not question his income and therefore had no reason to question his expenses, which he claimed went hand-in-hand with his income.
[28] Despite the opportunity of making a quick and easy substantial profit on the sale of the two mobile homes he had purchased, the appellant preferred to make the mobile homes part of the inn that was being built.
[29] No plausible, verifiable explanation was provided for the source of the $18,500 cash payment for the two mobile homes. More importantly, the appellant stated that, in an outlying area, mobile homes could be stolen or vandalized and were therefore very vulnerable assets; as a result he felt obliged to pay cash and to move the mobile homes as soon as the sale had taken place. The receipt for $18,500 in payment for the mobile homes (Exhibit A-2) is dated July 12, 1992, whereas the ''truck rental'' invoice for $4,606.96 to transport the mobile homes (Exhibit A-12) is dated October 23, 1992¾a difference of over two months between these two dates.
[30] The appellant never kept adequate accounts; he explained that he owned a notebook, in which he made jottings and from which, at the end of the year, he tore out pages to provide the accountant with the information they contained
[31] During the review, that accountant stated that the appellant's statements of income and expenses were prepared on the basis of the appellant's cost of living. The accountant even suggested that, in reviewing the appellant's case, the auditor proceed using the net worth method.
[32] The appellant had formally stated that the company he controlled was inoperative. Despite that solemn declaration, the evidence showed that the appellant had used invoices from that company on the pretext that they were the only ones available.
[33] The appellant leased major machinery from the company Asphalte G.M.P. Inc.; however, this machinery was never shown anywhere in the accounting books.
[34] To travel to the site of the outfitting business, the appellant used a 4 x 4 truck, purchased by him personally but apparently used solely for the operations of the outfitting business. The appellant explained that he had had to proceed in this fashion in order to obtain the manufacturer's guarantee.
[35] According to the appellant, the truck was used almost exclusively for the operations of the outfitting business. Here again, the appellant's oral explanation was neither supported nor documented. The appellant kept no record of kilometrage driven.
[36] On this point, it is indisputable that the appellant in fact had the benefit of the vehicle for personal use. To what extent did he use it for personal purposes? Only a record could have established this figure. What is certain is that the appellant enjoyed the right to use the truck.
[37] The appellant not having considered it appropriate to keep such a record-which was moreover relevant given his testimony that the vehicle had been purchased by him personally but was intended solely for the operations of the outfitting business-he must bear the consequences of the confusion that he alone created.
[38] The evidence established that the appellant could use the vehicle for personal purposes; there is no need to alter the assessment, which was correct under the circumstances.
[39] Given the evidence of the appellant's actions, the Minister was fully justified in making a reassessment for the 1992 taxation year, even though the normal period for making a reassessment had expired. An impressive number of factors clearly showed that the appellant had neglected and indeed deliberately failed to provide information that was essential in computing his income. In particular, this point was made clear by the appellant's refusal to provide evidence of the expenses claimed. He went so far as deliberately reducing his income by an amount equivalent to the expenses disallowed by the respondent. I consider this type of behaviour quite indicative of the appellant's firm intentions of deliberately concealing information that was essential in computing his actual income.
Penalties
[40] The evidence showed that, despite having had little education, the appellant was a very canny person with very good business experience. His knowledge was more extensive and thorough than he claimed to have.
[41] The appellant was aware of the importance of invoices, going so far as to writing some up when they were not available. He knew that any earnings from the outfitting business Le Chasseur Inc. had to be heavily taxed.
[42] The appellant knew the maximum amount of a business' non-taxable sales.
[43] The appellant was a skillful, canny businessperson, not the naïve, inexperienced labourer he purported to be.
[44] The appellant was entirely aware of the tax consequences of his actions. He regularly used cash, often in substantial amounts, in his transactions. Nothing in the Act prevents taxpayers from using cash in any transactions. However, this does not exempt individuals from the obligation to provide adequate, plausible, verifiable explanations regarding the source or use of funds flowing in their asset bases.
[45] Since the appellant was responsible for three sets of finances: those belonging to him, those of the outfitting business Le Chasseur Inc. and, lastly, those of R.S. Air Inc., at one time inoperative according to the appellant, he used them indiscriminately.
[46] For his personal finances, the appellant did not keep any accounting records except for a loose-leaf notebook, the relevant pages of which were given to the accountant at the end of the year. Accounting information was so deficient that even the accountant, who obviously did not testify, advised the auditor to proceed using the net worth method. The appellant went so far as to express surprise that the respondent wanted vouchers as evidence of the expenses.
[47] At all times and during all the periods, the appellant was aware of and familiar with all the tax consequences of his actions. He himself controlled the information, which he did not even share with his accountant, whom he still found reason to criticize at times.
[48] The appellant had the knowledge and the ability to manage his affairs so as to ensure that they were transparent and accessible for audit. He chose to do otherwise, organizing his affairs in such a way that the confusion would allow him to avoid his obligations.
[49] These actions largely suffice to conclude that there has been gross negligence that justifies the assessment of the penalties provided for in the Act.
[50] Therefore, the appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 7th day of June 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 26th day of August 2003.
Sophie Debbané, Revisor