[OFFICIAL ENGLISH TRANSLATION]
2001-2004(IT)I
BETWEEN:
WARREN THIBAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 15 and 16, 2002, at Montréal, Quebec, by
the Honourable Judge P. R. Dussault
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Susan Shaughnessy
Dany Leduc
JUDGMENT
The appeals from the assessments made under the Income Tax Act (the "Act") for the 1997 and 1998 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $7,431 added to the income reported for 1997 shall be reduced by $2,300 to $5,131, and the penalty under subsection 163(2) of the Act shall be adjusted accordingly; that the amount of $31,758 added to the income reported for 1998 shall be reduced by $6,750 to $25,008, and the penalty under subsection 163(2) of the Act shall be computed on the basis of additional income of $21,146.
The appeal from the assessment made under the Act for the 1999 taxation year is dismissed.
The whole in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 21st day of June 2002.
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"P. R. Dussault" |
J.T.C.C.
Translation certified true
on this 17th day of September 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020621
Docket: 2001-2004(IT)I
BETWEEN:
WARREN THIBAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
P. R. Dussault, J.T.C.C.
[1] These are appeals from assessments made under the Income Tax Act (the "Act") for 1997, 1998 and 1999.
[2] By those assessments, the Minister of National Revenue (the "Minister") added to the appellant's income the sums of $7,431, $31,758 and $6,644 for 1997, 1998 and 1999 respectively. Penalties under subsection 163(2) of the Act were also assessed on the basis of unreported income of $7,431 for 1997 and of $27,986 for 1998.
[3] In making those assessments, the Minister assumed the facts stated in subparagraphs 6(a) to (r) of the Reply to the Notice of Appeal (the "Reply"). Those subparagraphs read as follows:
[TRANSLATION]
Business Audit
(a) the appellant has operated an automotive repair shop since the early 1990s and also sells used cars;
(b) the appellant made his repairs during the years in issue from his garage located near his residence;
(c) the appellant mainly repairs Mercedes automobiles;
(d) most of the appellant's customers pay for his repairs in cash, and he moreover pays cash for most of his purchases from suppliers;
(e) the appellant does not always issue invoices for inexpensive repairs;
(f) for the years in issue, the appellant reported net business income of $9,948, $10,280 and $8,408 respectively;
(g) during the taxation years in issue, the appellant owned no set of books or records of account for his business;
(h) in view of the poor internal control of the business, the Minister audited the appellant's income using the net worth method (see Schedules A to C and E to O);[1]
(i) most personal expenses were estimated by analyzing bank withdrawals and by adding the invoices of undeposited sales:
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1997 |
1998 |
1999 |
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analysis of withdrawals undeposited sales various headings |
$ 5,398 10,139 2,300
$17,827 |
$ 7,271 13,934 8,432
$29,637 |
$ 6,200 5,539
$11,739; |
(j) analysis of the annual change in net worth yielded the following results:
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1997 |
1998 |
1999 |
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net sales - vehicles disallowed expenses taxable capital gain unreported income - net worth method |
$ 1,033
10,557
$11,590 |
$18,873 4,367
8,606
$31,846 |
$15,000 1,200 4,021
3,364
$23,585; |
(k) during the audit, vehicle sales for which the appellant had not considered any tax implications were discovered and considered as part of the commercial activities:
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1998 |
1999 |
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proceeds of sales vehicle purchases |
$58,588 38,715 |
$15,000
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net unreported sales of used vehicles |
$19,873 |
$15,000; |
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(l) all parts expenses were disallowed for the following reasons:
(i) the cost of new parts necessary for repairs were charged to the customer;
(ii) used parts came from old cars purchased in 1992 and 1993;
(iii) the calculation of the claim was the result of a simple estimate wholly unrelated to actual expenditures;
Objection Stage
Adjustments - Revision of Additional Income (Worksheet 1)
(m) the Minister was convinced that the table of personal expenses should be revised downward as follows:
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1997 |
1998 |
1999 |
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previous estimate |
$17,827 |
$29,637 |
$11,739 |
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less: undeposited invoices |
10,139 |
13,934 |
5,539 |
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7,688 |
15,703 |
6,200 |
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plus: personal expenses paid in cash |
5,980 |
5,134 |
5,134 |
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revised estimate |
$13,668 |
$20,837 |
$11,334; |
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(n) in computing the change in net worth, the Minister excluded an amount of $5,287 received in 1999 as insurance proceeds relating to a tool theft;
(o) the Minister considered as a capital gain the profit realized on the sale of the "1983 Mercedes" in 1998 and the GMC truck in 1999; the non-taxable portion was thus excluded from the calculation of the change in net worth:
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1998
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1999 |
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non-taxable portion |
$1,288 |
$1,250; |
(p) the Minister added to the appellant's assets for the 1998 taxation year the GMC truck at a cost of $10,000; that same asset, which was sold in 1999, was removed from the balance sheet;
(q) following the various adjustments made by the Minister, only the revised amounts of $7,431 and of $27,986 were subjected to the penalty under subsection 163(2) of the "Act" for the 1997 and 1998 taxation years respectively;
(r) in failing to report all his income for the 1997 and 1998 taxation years, the appellant knowingly or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of a false statement or omission in the tax returns filed for the 1997 and 1998 taxation years, as a result of which the tax that he would have been required to pay according to the information provided in the tax returns filed for those years was less than the amount of tax payable for those years.
[4] Counsel for the respondent admitted that the amount used to compute the penalty under section 163(2) of the Act should be $27,896, not $27,986, as stated in subparagraph 6(q) for 1998, and that the penalty should be adjusted accordingly.
[5] The appellant and his companion, Edith Campagna, testified. Michelle Laliberté, auditor, and Martin Nadeau, objections officer, testified for the respondent.
[6] In his testimony, the appellant disputed both the audit conducted by Ms. Laliberté and the assessment based on the net worth method and the results obtained. He also challenged the process followed in response to his objection and to the way in which Mr. Nadeau had handled his case.
[7] The appellant complained that authorities had refused to transfer his file from the Rouyn office to the Laval office, when he himself had moved to St-Sauveur in December 1999. Asserting that he had provided all the documents and information required, the appellant claimed that the draft assessment that Ms. Laliberté had sent him on July 28, 2000, was based on a complex document of which he understood nothing. In his view, despite repeated requests, Ms. Laliberté had been unable to provide him with satisfactory explanations of certain points, particularly the fact that she had added what was described as "undeposited sales" to the initial net worth calculation and that she had treated certain transactions involving automobiles and a motorcycle as representing personal expenses. The appellant said that he had taken additional steps to have the file transferred to the Laval office but without success. The assessment, in accordance with the draft presented to the appellant, was made on September 12, 2000.
[8] The appellant said that he had tried to obtain additional explanations from persons met at the Laval office who appeared to be "annoyed" by the file. Lastly, he was simply advised to see a tax expert.
[9] At the objection stage, the appellant particularly criticized Martin Nadeau for proposing to him at the outset that he set aside the statement of net worth prepared by the auditor and reassess him on the basis of specific transactions. Mr. Nadeau purportedly refused to consider the statement of net worth that he himself had prepared. According to the appellant, Mr. Nadeau also refused to allow him to submit new documents from third parties or to meet those persons, even though, the appellant said, they could have attested to certain things.
[10] The appellant said that Mr. Nadeau had also refused to give him the auditor's report (Form T-20), which the appellant had been unable to obtain under the Access to Information Act. Mr. Nadeau purportedly told him that the report had been lost. The appellant said that he did not receive the report until July 12, 2001. He further asserted that he had noted certain signs of disagreement between the officials over the way in which the statement of net worth had initially been prepared (see Exhibit A-1).
[11] In response to the appellant's objection, reassessments were finally made on May 9, 2001, including the adjustments stated in subparagraphs (m) to (q) of the Reply.
[12] At the hearing, the appellant disputed the assessments made in response to his objection, claiming that the statement of net worth prepared by the auditor, Ms. Laliberté, was incorrect as a whole, and he filed his own statement of net worth (Exhibit A-8).
[13] The appellant more particularly challenged the following points:
1. The auditor's addition of amounts identified as "undeposited sales" to personal expenses;
2. The treatment given to the proceeds of the sale of a 1987 Suzuki, a 1980 Mercedes and a 1982 Mercedes, which were added to personal expenses instead of being included in assets;
3. The selling price set for a 1990 Toyota, a 1983 Mercedes and a 1992 GMC truck;
4. The treatment given to insurance proceeds received following a tool theft in 1998;
5. The addition of losses on personal-use property to the change in net worth;
6. The addition of business income, not a capital gain, from the sale of the 1983 Mercedes in 1998 and of the 1992 GMC truck in 1999;
7. The refusal to accept additional business expenses relating to parts from two Mercedes vehicles acquired in 1992 and 1993;
8. The fact that a number of assets were not indicated under the heading "Fixed Assets" in the balance sheet. The appellant added those assets in his own statement of net worth and said that he had disposed of them in 1998 and 1999;
9. The fact that he had received the cash surrender value of approximately $4,600 when he cancelled a life insurance policy with Clarica in 1998;
10. The fact that he had not taken into account the repayment in 1998 of a $5,000 loan made to a friend in 1988;
11. The fact that the estimate of personal expenses was much too high;
12. The fact that the sale in 1998 of a 1980 Mercedes belonging to his daughter had been included;
13. The failure to consider that the sale proceeds of a 1988 Oldsmobile given to his son in July 1998 and resold the next day were owed to his son;
14. The penalties assessed for 1997 and 1998.
[14] In the years in issue, the appellant operated an automotive repair business, working mainly with Mercedes automobiles at his private garage in Rouyn, Quebec. The cost of repairs was billed to customers at a rate of $30 an hour. The cost of parts ordered was charged directly to customers. The cost of certain parts from old cars of the same make acquired by the appellant was billed to customers at half the price of new parts. On this point, the appellant moreover claimed additional business expenses, which were disallowed. I will address this point later. In 80 percent of the cases, customers paid the invoices in cash.
[15] The appellant asserted that he had reported all his income, which equalled the amounts in the invoices issued, to which a slight increase was made, he said, to account for minor jobs worth approximately $10 each for which no invoices were issued. The appellant admitted, however, that all of his jobs had been recorded in personal agendas, which had been destroyed. The 1999 agenda, which was still in his possession at the time of the audit and had been requested by Ms. Laliberté, was never handed over to her and was destroyed by the appellant. The appellant had no other records and kept no other form of accounting during the years in issue.
[16] At the time of the audit, the appellant told Ms. Laliberté that he had not deposited all the amounts billed and paid by his customers and that he had kept some cash to pay his expenses. Ms. Laliberté compared the amounts billed with those deposited and, giving the appellant the benefit of the doubt, found that large sums representing amounts billed to customers had not been deposited. Throughout the exercise, she assumed that the appellant could not reasonably have deposited amounts billed to his customers before the date of the invoice or even two months thereafter. She concluded that the appellant had retained those amounts to pay personal expenses in cash, and she therefore added them to the personal expenses determined on the basis of the bank statements.
[17] In his testimony, the appellant challenged the way in which the auditor had proceeded, asserting that the amount of a deposit made on a Friday, for example, did not necessarily correspond to the total of one or more invoices since it was possible for him to receive cash from a number of customers in a given week and deposit only a portion of it. Even if this explanation were accepted, the exercise Ms. Laliberté had engaged in was not as simplistic as the appellant in fact wanted to suggest in his testimony.
[18] In any event, point 1 raised by the appellant in his objection was resolved in his favour by Mr. Nadeau, who reassessed solely on the basis of the change in net worth, to which he had added the appellant's personal expenses paid in cash, based on information provided by the appellant at the time of the audit. The total of the amounts that were added to undeposited sales was therefore excluded by Mr. Nadeau on the ground that the amounts in question could just as easily have been used to purchase goods as to pay personal expenses. As a result, point 1 is no longer an issue.
[19] At the time of the audit, Ms. Laliberté observed that the appellant had conducted many transactions involving motorcycles, automobiles, mainly Mercedes vehicles, and also an airplane. The appellant never included those numerous transactions in his tax returns. He said that he had considered them as strictly personal and unrelated to his business. However, he also failed to report the capital gains resulting from those transactions. In a few transactions, the appellant had merely acted as an intermediary. Some had involved cash amounts and no invoices had been issued. However, the auditor traced a number of large deposits. (See the Reply to the Notice of Appeal, Schedule 3.)
[20] In certain transactions that were noted, no deposit could be traced, and the sale proceeds were added to personal expenses on the basis that they had been used for that purpose. In his testimony, the appellant stated that he had definitely deposited at least a portion of the amounts received. That question concerns point 2. Contrary to the appellant's claim, the 1987 Suzuki, sold in 1997 for $1,300, was in fact recorded at a cost of $1,300 in fixed assets for 1996. The same was true of the 1982 Mercedes sold in 1997 for $1,000, which was entered in fixed assets for 1996 at a cost of $1,000. Here I find that the total amount of $2,300 should not be added to the change for 1997 since, as is the case of the "undeposited sales" identified in relation to the repairs billed, it is plausible that the proceeds of the sale of those assets might have been used to acquire other fixed assets. In my view, they should be treated in the same way as Mr. Nadeau treated the "undeposited sales". That question was addressed in point 1 above.
[21] As to the 1980 Mercedes, it is not indicated in the appellant's fixed assets. That automobile was purchased in 1997 and registered in the name of the appellant's daughter. It is not known exactly who paid the price at the time. The appellant claimed that the cost was between $3,000 and $3,500 and that he had made many repairs to it. In 1998, the appellant registered it in his name and resold it immediately thereafter for $4,200. The appellant claimed that he had deposited a sum of between $3,500 and $3,800 in his daughter's bank account but could not bring any evidence of that. First, since the appellant resold the automobile in the same year it was acquired, it is normal for it not to appear in fixed assets for 1998. No cost was allowed. However, since they were not deposited, the total proceeds of $4,200 were added to the appellant's personal expenses. Here again, those proceeds could as easily have been used to acquire other fixed assets as to pay the appellant's personal expenses since they were not deposited. In my view, for the same reasons as those given earlier in relation to the 1987 Suzuki and the 1982 Mercedes, the amount of $4,200 must be deducted from the change in the appellant's net worth for 1998.
[22] Point 3 concerns the selling price of three vehicles. The first, a 1990 Toyota truck, was acquired by the appellant in 1996 for $10,781.68, and it was entered at that cost in fixed assets for 1996 and 1997. In 1998, the appellant exchanged that truck for a 1983 Mercedes, without any additional disbursement on either side. The selling price stated in the contract was $7,850 (Exhibit A-6). The appellant claimed that both vehicles were worth $10,000 and that he had had no control over the price, which the merchant had fixed in the contract. In the absence of additional evidence, I find I must rely on the price stated in the contract. The sale of the 1990 Toyota truck resulted in a personal-use property loss of $2,931.58, the treatment of which is examined in relation to point 5.
[23] Still in 1998, the 1983 Mercedes thus acquired was exchanged for a 1992 GMC truck. The price fixed in the contract was $13,000 (Exhibit A-7). Initially, no additional amount was paid on either side. The Mercedes having been bought for $7,850, according to the contract, and resold for $13,000, the profit of $5,150 was treated as business income. At the objection stage, Mr. Nadeau treated the transaction as resulting in a capital gain and reduced the change in net worth for 1998 by the amount of the non-taxable portion of the gain (25 percent), that is, $1,288 (Exhibit I-30). In the absence of additional evidence, I find that the use of the price fixed in the contract was entirely warranted.
[24] Shortly thereafter, it was realized that the odometer of the 1992 GMC truck had been tampered with, and the appellant, who said he had wanted to alert the police, was given a cheque for $3,000 by the merchant. Although the appellant considered that that amount had been given to him to buy peace, I find the auditor was correct in setting the acquisition cost of the truck for the appellant at $10,000. That truck was resold in 1999 for $15,000. The auditor considered the $5,000 profit as business income. As a result of the appellant's objection, however, Mr. Nadeau treated the transaction as giving rise to a capital gain and subtracted the non-taxable portion (25 percent), that is, $1,250 from the change in net worth for 1999.
[25] Since the 1990 Toyota had been considered by the auditor as the appellant's personal vehicle, and thus as personal-use property, the 1983 Mercedes and the 1992 GMC truck, which were subsequently acquired one after the other by exchange, were considered in the same way, and the matter was straightened out at the objection stage. Mr. Nadeau treated those two transactions as giving rise to a capital gain, not business income, and the non-taxable portion of the two gains was deducted from the change in net worth for 1998 and 1999 (Exhibit I-30).
[26] Point 4 concerns the treatment of the insurance proceeds of $5,287 received in 1999 in relation to a tool theft. That question was settled by Mr. Nadeau in response to the appellant's objection, and the amount was deducted from the change in net worth for 1999 (Exhibit I-30).
[27] Point 5 concerns the addition of personal-use property losses to the change in net worth. First, there was a loss of $2,333.72 from the sale of a trailer in 1997. The appellant himself set the cost of the trailer at $4,533.72 and the selling price was $2,200. The other loss of $2,931.58 was incurred in 1998 on the exchange of the 1990 Toyota truck for the 1983 Mercedes. It was established on the basis of its cost and of the selling price fixed in the contract (Exhibit A-6). I have addressed the question of the price in relation to point 3 above. Those losses were added for the purpose of establishing the change in net worth for 1997 and 1998. They were not deductible for tax purposes because the reduction of the value of the property is supposed to represent an element of personal consumption. They must be added to establish the change so as not to conceal the receipt of unreported additional income.
[28] Point 6 was discussed in relation to point 3. In addition, the 1992 GMC truck was added to the change in net worth for 1998 at a cost of $10,000, and the same amount was deducted from the change in net worth for 1999. That treatment is correct.
[29] Point 7 concerns the additional parts expenses that were disallowed. The appellant, who in 1992 and 1993 purchased two Mercedes vehicles for parts for a total price of $9,000 (see Exhibit A-9), claimed that he should be allowed to deduct the cost of parts used for repairs billed to his customers over three years. The auditor disallowed the deduction on the ground that the total cost of the automobiles had been claimed in the years prior to 1996. The appellant brought no new evidence in his testimony, even though he disputed that point. The reassessment made by Mr. Nadeau in response to the appellant's objection was based solely on the method of change in net worth, to which were added the personal expenses paid in cash for each of the years 1997, 1998 and 1999 respectively, such that this element has no impact on the assessment in issue.
[30] Point 8 concerns personal property the appellant asserted that he owned at the start of the years in issue and which he purportedly disposed of in 1998 and 1999. Those assets are listed in his own statement of net worth filed in evidence (Exhibit A-8). Apart from furniture and the engine discussed below, the items and the amounts stated are as follows:
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1996 |
1997 |
1998 |
1999 |
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300+++ differential Ramsey winch Torch set Snowmobile parts Framed charcoal drawing, Charlotte Trailer awning |
645 1,500 625 2,000
800 1,300 |
645 1,500 625 2,000
800 1,300 |
1500 625 |
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[31] In cross-examination, the appellant admitted that the amounts stated represented the cost of that property "from memory" or its selling price, as was the case for the "Ramsey winch" or the torch, for example. Except for the charcoal drawing, no invoice or other document was filed in evidence either to establish the date on which the property was acquired and the price paid or to establish its sale and the price obtained. The appellant provided no other information about the buyers and the circumstances of those transactions. It should be noted that the existence of those assets was not mentioned to the auditor, despite the fact that she had asked the appellant to make a list of his assets. In his testimony, the appellant stated that he had not understood the importance of that request. In the case of the "framed charcoal drawing", the appellant filed in evidence an undated certificate, signed by a certain Francine Tardif, who stated that she had acquired the work at a price of $800, paid in cash (Exhibit A-11). Counsel for the respondent objected to that evidence being admitted on the ground that she was unable to cross-examine the author of the document. I find the objection valid.
[32] As to the automobile engine sold to Johnex Motosports in 1998, the appellant entered a cost of $5,850 in his own statement of net worth (Exhibit A-8). He explained that he acquired the property personally a number of years earlier and that he resold it because he had been offered a good price. The auditor treated the item as part of the inventory of the business and allowed the appellant a cost of $2,800, which, in her view, was the amount the appellant initially said he had paid. At the hearing, the appellant denied that he had stated that amount. However, no additional evidence was brought concerning the actual cost of the engine.
[33] In the statement of net worth prepared by the auditor, the value of the furniture the appellant owned at the start of and throughout the audit period was set at $10,000. In his own statement of net worth (Exhibit A-8), the appellant set the cost of his furniture at $6,000 at the start of the period and in 1997 and 1998. In 1999, the amount shown is $1,900. The appellant explained that, when he moved to St-Sauveur with his companion, Ms. Campagna, he sold furniture since she already had some. There is no evidence of what was sold, to whom or at what price.
[34] All things considered, on this point, the evidence adduced by the appellant is insufficient to allow me to reduce the changes in net worth for the years in issue on the basis of the figures simply recorded in his own statement of net worth, since there is no evidence on which the authenticity of the transactions and the figures put forward can be verified.
[35] Point 9 concerns the cash surrender value of $4,600, which the appellant claims he received from the Clarica insurance company as a result of the 1998 cancellation of a life insurance policy on his son. The bank statements (Exhibits A-2, A-3 and A-4) clearly show monthly payments of $14.86 for a life insurance policy with Metlife/La Metro in 1997, in 1998 and until June 1999. In July 1999, the same payment is identified under the name of Mutual Life, and from July to December 1999, under the name of Clarica. The appellant filed no other document on that point. I find that the evidence does not establish that a cash surrender value of $4,600 was received in 1998.
[36] Point 10 concerns the repayment the appellant purportedly received in the amount of $5,000, which he said he lent to a friend named Carole Cossette in 1988. The appellant filed two documents in evidence (jointly as Exhibit A-10). The first, dated August 11, 2000, is only initialled and confirms that an amount of $5,000 was remitted to the appellant in 1998 as final payment of a debt contracted by a third person, the details of which are confidential. The second document, dated February 4, 2001, was signed by "C. Cossette". It states that an amount of $5,000 was borrowed from the appellant in 1989, without interest, and that it was entirely repaid by Réjean Blais in 1998.[2] Counsel for the respondent objected to this evidence being admitted on the ground that those persons had not been called as witnesses and that she therefore could not cross-examine them. I find the objection valid, particularly since the appellant admitted in his testimony that Mr. Blais and his spouse, who owned a Mercedes, had exchanged it for a more recent one in 1998. In conclusion, in light of the doubt raised and the absence of acceptable evidence, I find that there is no reason to make an adjustment on this point.
[37] Point 11 concerns the estimate of personal expenses. At the objection stage, Mr. Nadeau deducted the amounts the auditor had added to personal expenses as "undeposited sales", and he simply added the personal expenses paid in cash, that is to say, those that had not been paid out of the appellant's bank account (Exhibit I-30). To do this, Mr. Nadeau used the estimate provided by the appellant (Exhibit I-5), making certain adjustments in light of the information contained, in particular, in the appellant's bank statements and tax returns (Exhibit I-31). The appellant claimed that the expenses paid in cash were lower than those established by Mr. Nadeau. He contended, on the one hand, that a friend, a certain Marcel Asselin, who had worked in three-month periods in Indonesia, had come to live with him in a room in the basement for approximately two months in 1998 and several months in 1999. By way of rent, that person had purportedly paid certain hydro and telephone bills in cash. On the other hand, the appellant stated that his girlfriend had come to live with him in 1998 and that she too had paid certain expenses in cash. In 1999, it was he who apparently went to live at her place and did not pay any expenses.
[38] In her testimony, the appellant's companion, Ms. Campagna, said that the appellant was very thrifty and lived on little money. She also confirmed that she had paid certain food, hydro and telephone expenses. She said that Marcel Asselin had also paid certain bills in 1998 and 1999. However, the appellant did not explain how he had determined his personal expenses precisely as he had done in his own statement of net worth (Exhibit A-8), having regard to the information previously provided to the auditor (Exhibit I-5). The total difference between the amounts estimated by the appellant for food and electricity and those estimated by Mr. Nadeau was $2,100 for 1998. It should be noted that Mr. Nadeau indicated no separate amount for telephone expenses (see Exhibit I-31). In the absence of details and additional evidence, I am prepared to concede one-half of the difference to the appellant, that is, an amount of $1,050 for 1998.
[39] For 1999, the total difference between Mr. Nadeau's estimate and that of the appellant for food and electricity was $1,857. Here I would have been prepared to do the same as for 1998 had it not been for the fairly surprising result to which the adjustments previously made by Mr. Nadeau led. For 1999, the result of the adjustments made by Mr. Nadeau at the objection stage was that the net change plus personal expenses amounted to only $6,644, more than $1,000 less than the taxable capital gains (75 percent) the appellant realized that year and did not report: $4,021 in respect of an airplane and $3,750 in respect of the 1992 GMC truck, for a total of $7,771. I therefore find that there is no reason to reduce further the amount assessed.
[40] Concerning point 12, an adjustment of $4,200 was previously made, which I discussed earlier in point 2.
[41] Point 13 concerns a transaction the appellant conducted in 1998 for a certain Mr. Bonapace, who wanted to acquire a 1990 Mercedes that was in Toronto. The appellant went to Toronto to buy the automobile, which was then transferred to Mr. Bonapace. It appears the car was then completely cleaned by the appellant's son. Mr. Bonapace, who wanted to transfer his licence plates to the Mercedes, purportedly then gave his car, a 1988 Oldsmobile, to the appellant's son. It should be noted that the auditor, Ms. Laliberté, noted that the appellant first told her that the car had been given to him (Exhibit I-8, page 7), and then he apparently told her that it had in fact been given to his son. The appellant resold the car the next day to his neighbour, Joelle Rivard, for $1,500. Although he deposited the money in his own account, the appellant said he told his son that the money was for his education. At the hearing, the appellant maintained that version and filed in evidence a cheque dated August 17, 2000, for $1,500 made out to his son (Exhibit A-14). Not without some hesitation, I decided to give the appellant the benefit of the doubt on this point. Assuming that the $1,500 belonged to the appellant's son and thus represented a debt, the change in net worth for 1998 will have to be reduced by an equal amount.
[42] Point 14 concerns the penalties assessed for 1997 and 1998. First, it should be noted that, as a result of the objection, Mr. Nadeau reduced the penalties assessed by the auditor. Two transactions that had initially been treated as resulting in business income, those involving the 1983 Mercedes in 1998 and the 1992 GMC truck in 1999, were instead treated as resulting in taxable capital gains (see point 3 above). Since no penalty had been assessed in respect of the taxable capital gain resulting from the sale of an airplane in 1999, Mr. Nadeau stated in his testimony that it had been decided that no penalty would be assessed in relation to the taxable capital gains realized on the sale of the 1983 Mercedes in 1998 or the 1992 GMC truck in 1999.
[43] Subject to the adjustments made to reflect the reduction of the additional amounts included in the appellant's income for 1997 and 1998, I find that the penalty must be confirmed.
[44] The appellant, who operated a business during the years in issue, had a duty to keep adequate accounting and appropriate records as required by section 230 of the Act, which he did not do. In addition, the agendas he owned and in which certain income from his business was recorded were deliberately destroyed. The agenda for 1999 was destroyed after the auditor had requested it. Since most of the customers of the business paid in cash and the appellant deposited only a portion of that money in the bank, keeping and maintaining appropriate records was all the more necessary to make it possible to audit the results of his operations with a minimum of thoroughness. The appellant stated that the information he had, including that entered in his agendas, had been given to his accountant. However, he admitted that he did not verify the accuracy of the returns filed. An audit of the results of his operations proving impossible, the authorities had to resort to the net worth method, which, as we know, entails certain difficulties.
[45] Moreover, during the years in issue, the appellant conducted numerous transactions involving vehicles and property of all kinds, which he never reported in his tax returns. I know here that the auditor, Ms. Laliberté, said that with the aid of a document obtained from the Société d'assurance automobile du Québec (Exhibit I-16), she had counted some 11 transactions involving purchases and sales of Mercedes vehicles since 1994. In his testimony, the appellant stated that the transactions he had conducted were strictly personal. However, it is fairly difficult to accept that he could have believed that he did not even have to report the resulting capital gains, as he asserted.
[46] The amounts added to the appellant's income were significant in relation to his reported income. The cooperation, which he said he showed during and after the audit, cannot conceal the fact that he deliberately destroyed documents that might indeed have contained personal information but also information concerning the operation of his business, which, as a result, he refused to communicate to tax authorities.
[47] As a result of the foregoing, I find that the penalties under subsection 163(2) of the Act must be confirmed and that they must simply be adjusted on the basis of the additional amounts ultimately added to the appellant's reported income for 1997 and 1998.
[48] In short, the appeal from the assessment made for 1997 is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the amount of $7,431 added to the reported income shall be reduced by $2,300 to $5,131 and the penalty under subsection 163(2) of the Act shall be adjusted accordingly.
[49] The appeal from the assessment made for 1998 is allowed, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the amount of $31,758 added to the reported income shall be reduced by $6,750 ($4,200 + $1,050 + $1,500) to $25,008, and the penalty under subsection 163(2) of the Act shall be computed on the basis of additional income of $21,146.
[50] The appeal from the assessment for the 1999 taxation year is dismissed.
Signed at Ottawa, Canada, this 21st day of June 2002.
|
"P.R. Dussault" |
J.T.C.C.
Translation certified true
on this 17th day of September 2003.
Sophie Debbané, Revisor