[OFFICIAL ENGLISH TRANSLATION]
2001-1780(IT)I
BETWEEN:
ARTHUR DOYON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of
Bar Le Villageois Inc.(2001-1781(IT)I)
on June 14, 2002, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Stéphanie Côté
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the Reasons for Judgment.
Signed at Ottawa, Canada, this 19th day of June 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
2001-1781(IT)I
BETWEEN:
BAR LE VILLAGEOIS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of
Arthur Doyon(2001-1780(IT)I)
on June 14, 2002, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the Appellant: Arthur Doyon
Counsel for the Respondent: Stéphanie Côté
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the Reasons for Judgment.
Signed at Ottawa, Canada, this 19th day of June 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020619
Docket: 2001-1780(IT)I
BETWEEN:
ARTHUR DOYON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2001-1781(IT)I
BETWEEN:
BAR LE VILLAGEOIS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence under the informal procedure. At issue in both cases are the taxation years from 1996 to 1998. The appeals are from assessments of the appellant Arthur Doyon (the "appellant") made on a net worth basis.
[2] With respect to Bar Le Villageois Inc. (the "appellant company"), the Minister of National Revenue (''the Minister'') added the assumed undeclared income of Arthur Doyon, the company's sole shareholder, to the respective amounts of $7,819, $13,159 and $10,439. The Minister also disallowed housing expenses of $6,606, $6,253 and $6,264, as well as alcoholic beverage expenses of $329, $335 and $340.
[3] With respect to the appellant, the Minister added the above-noted amounts to the categories of appropriation of funds, housing benefits, and other benefits (beverages), obtaining totals of $14,754, $19,747 and $17,043 respectively.
[4] In 1996, the appellant declared income of $23,874, most of which was employment income of $21,782 from Alimentation Doyon et fils Inc., an incorporated family business. For 1997, the appellant declared income of $8,350, that is, employment income of $3,879 and employment insurance benefits of $3,705. However, according to the calculation of his net worth (Exhibit I-1), in 1997 he received a disability insurance payment of $3,243 and a provincial income tax refund of $2,245. In 1998, he declared income of $17,752, including $14,189 in disability benefits from the Régime des rentes du Québec (Exhibit I-8). Also in 1998, he withdrew $3,563.94 from a Registered Retirement Savings Plan (''RRSP'').
[5] The report of the audit made on a net worth basis or the "appellant's balance sheet" was adduced as Exhibit I-1. Raymond Parent, an auditor for Revenue Canada, explained the net worth he had calculated. He stated that he had used this method because the appellant company's accounting system was inadequate.
[6] Mr. Parent adduced as Exhibit I-5 the withdrawals made from the appellant's bank account during the taxation years at issue, totalling $29,060, $24,429 and $20,828 respectively. Mr. Parent pointed out that these figures corroborated the accuracy of the assessments, particularly the total amounts of the appellant's personal expenses (set out in appendix 5 to Exhibit I-1) for the taxation years at issue. Those amounts were $26,882, $26,867 and $27,206 respectively. These expenses included housing expenses averaging $6,300.
[7] With respect to his current situation, the appellant testified that he is disabled, that the bar has been closed since April 2000, and that his spouse left him in November 1998 because she was tired of living from day to day. He has not owned a car since 1996. Although he advanced money to the appellant company, he had obtained the money either by working for Alimentation Doyon et fils Inc., the family business, or by selling his shares in that business in 1995. He tried to boost sales figures by hiring musicians but was unsuccessful and had to close the bar. At present he is still repaying the line of credit. The appellant further stated that the income he reported was the only taxable income he had earned in the taxation years at issue. He stated that he could not understand the present assessments because all he had done was to put his own money into his business without ever turning a profit.
[8] The main issue in this case is the amount of rent representing approximately $6,000 each year that was considered a benefit to the appellant and was included in his personal expenses. Those expenses claimed by the appellant were disallowed. In the Minister' opinion, they were an annual benefit that was taxable in the appellant's hands because he lived with his spouse and son on the second floor of the building in which the bar was located and which was owned by the appellant company. The Minister estimated that the appellant occupied 50 per cent of the building space for personal use. The Minister divided in two the actual building expenses for maintenance and repairs, taxes, insurance, mortgage interest, electricity, water and heating.
[9] Mr. Doyon explained that the building was formerly a village hotel. On the top floor are six rooms, which are rarely used. The appellant stated that the building space he occupied should have been estimated at 25 per cent since the building had a basement that was used as storage for the bar and, if use of the rooms on the third floor was made, they were used for the bar.
[10] In computing the appellant's income for each of the taxation years at issue, amounts for his personal consumption of products such as beer were assessed and disallowed. These amounts were small and there is no point in discussing them.
[11] The calculation of net worth noted the construction of a common wall, to which the appellant was obliged under civil law to contribute $3,801 in 1998. However, according to Exhibit I-2, he had to take out a loan for the full amount that same year.
[12] The net worth indicated ownership in 1995 of a car of such minimal value that no amount was assigned to it. The document also indicated that the car was sold in 1996 for $600, an amount that was deducted. In the subsequent years from 1996 to 1998, the appellant had no car.
[13] The net worth did not include ownership of any real property.
[14] The calculation of net worth took into account advances of $19,199, $11,580 and $13,390 respectively. According to the appellant, the source of these advances was money received from the 1995 sale of his shares in Alimentation Doyon et fils Inc., the family business. In 1996, he apparently received $9,000 plus employment income, for a total of $21,782. As well, the accountant for the appellants noted that the amounts of these advances were established in large part on the basis of accounting entries, which the Minister's representative appeared to question. All things considered, this point remained rather unclear, as did the nature of the amount received from Alimentation Doyon et fils Inc. in 1996.
[15] From 1996 to 1998, based on the appellant's net worth, he had bank balances of $6,261, $6,785 and $4,827 respectively but also had bank loans of $11,740, $7,780 and $7,542 respectively.
[16] The appellant company's balance sheet as at December 31, 1998, showed an accumulated deficit of $101,993.
[17] Arthur Doyon was paid no wages. He paid his spouse $5,000 and $6,706 in 1996 and 1998. Other than these amounts, wages were accounting entries just like advances from the director to the corporation.
Conclusion
[18] Concerning the housing benefit, Wilbrod Poulin, the accountant for the appellants, suggested during the arguments that this amount should have been accounted for in the appellant company's financial statements and not included as a housing benefit in computing the appellant's personal expenses. That benefit should have been deducted from the shareholder's advances to the corporation, and this would have reduced the company's losses.
[19] I told the accountant that it was unfortunate that he had not made this point when testifying or had not inquired of one of the Minister's two representatives who testified at the hearing about this because such a point usually constitutes evidence. Counsel for the respondent nevertheless responded to this point, stating that the financial statements could not be altered.
[20] With respect, I do not share that view. That view may be valid if the corporation is not an appellant as well; but in this case both the corporation and its shareholder are appellants, and the corporation may therefore alter the presentation of how its income is computed. Since this was the only argument made against the suggestion by the appellants' accountant, I accept the suggestion on the ground that it is reasonable given that it takes into consideration the economic situation in which the shareholder was given this benefit. The corporation paid the shareholder no wages, and thus it would be surprising for it to demand payment of rent. Since this benefit must be accounted for, this may be done by reducing the advances from the shareholder to the corporation; in this way, it need not be included in the appellant's income.
[21] Furthermore, I am convinced that the undeclared income cannot have been as great an amount as was indicated on the balance sheet drawn up by the Minister. I take as weighing in favour of this point the fact that in 1998 the appellant resorted to collapsing an RRSP. When someone is obliged to collapse an RRSP in order to live, that person is at the point of survival, not the point of failing to declare income. The Minister' representative emphasized the total amounts of the bank withdrawals (Exhibit I-5), but we must realize that the sources of most of these withdrawals were bank loans or the line of credit.
[22] It is difficult to understand why these assessments were made on the basis of net worth in the case of a person whose assets, in fact, consisted of only some $5,000 in bank accounts at year end, and whose loans always amounted to nearly half as much. As well, when the appellant company ceased its operations, there were apparently no offers to purchase or attempts to sell, which directly or indirectly suggests that it was not a profitable business.
[23] Generally, the net worth method is used in the case of a taxpayer who, over the years, has acquired many real estate properties, luxury vehicles, or Canadian or foreign bank accounts, but has not declared income corresponding to the increase in wealth or provided plausible explanations. It is surprising to see the net worth method used as a basis for assessments in a case such as the present one, where over the years there has been a decrease rather than an increase in the taxpayer's wealth.
[24] The evidence has not satisfied me that during the taxation years at issue, the appellant spent or earned more taxable income than he declared. I therefore consider that there is no reason to include any additional undeclared taxable income for those years.
[25] With respect to the appellant company, its appeal is allowed, except that 25 per cent of the housing expenses must be excluded from the business expenses. That amount must be used to reduce the amount owed by the appellant company to the appellant Arthur Doyon.
[26] The appeals are allowed, with costs, in favour of the appellants.
Signed at Ottawa, Canada, this 19th day of June 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.