Citation: 2004TCC142

Date: 20040614

Docket: 2001-4488(IT)G

BETWEEN:

ANNIE RICHARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

(Given orally at the hearing on September 3, 2003, at Montréal, Quebec,

and amended for clarity.)

Archambault J.

[1]      Annie Richard is challenging the assessments by the Minister of National Revenue (Minister) for the 1996, 1997 and 1998 taxation years. The Minister included undeclared income in her taxable income. After having considered the information provided at the objection stage, the Minister set this income at $17,241 for 1996, $32,197 for 1997 and $20,821 for 1998, and imposed penalties under the Income Tax Act (Act).

[2]      In her Notice of Appeal, Ms. Richard also indicated that she is appealing the assessments under the Excise Tax Act and the Act respecting the Québec sales tax since they refer to the amounts of GST and QST for 1997 and 1998. During the hearing, Ms. Richard acknowledged that the challenge to the assessments under these two acts was still at the objection stage and that, as a result, these assessments were not part of these appeals.

[3]      At the beginning of the hearing, the parties filed a partial consent to judgment in which they confirmed that the undeclared income to be added to Ms. Richard's income amounted to $14,890 for 1996, $22,538 for 1997 and $13,424 for 1998. Ms. Richard agreed to this consent in order to shorten the hearings and save costs. The only questions at issue that remain to be resolved are as follows: first, could the Minister have correctly made the reassessment for the 1996 taxation year, since it was done after the normal period for reassessments? In addition, could the Minister correctly impose penalties under subsection 163(2) of the Act? In other words, was the Minister justified in making a reassessment for 1996 as a result of the fact that Ms. Richard made a misrepresentation that was attributable to neglect, carelessness or wilful default or committed fraud in supplying her income tax return for that year, and for each of the taxation years 1996, 1997 and 1998 (the relevant period). Was the Minister justified in imposing a penalty due to the fact that Ms. Richard neglected to declare income under circumstances amounting to gross negligence?

[4]      In addition to the admission regarding the undeclared income contained in the partial consent to judgment, in a response to a Request to Admit, Ms. Richard also acknowledged the following three facts: during the relevant period she was a member of the Barreau du Québec, she was practicing law in Trois-Rivières and her profession as a lawyer constituted her primary source of income.

The facts

[5]      In addition to the facts admitted and outlined above, it must also be mentioned that the amounts Ms. Richard declared as income were $5,000 for 1996, $4,360 for 1997 and $1,346[1] for 1998.

[6]      During her testimony, the auditor for the Minister indicated that she had asked Ms. Richard to provide her with accounting records but Ms. Richard only provided a single document, a list of all the fees paid by her clients. After checking with the Société de l'assurance automobile and the Land Registration Office, the auditor noted that Ms. Richard seemed to have a better lifestyle than her declared income would permit and, as a result, the auditor was not able to verify that the amounts declared by Ms. Richard were in fact the appropriate amounts. She concluded that she would have to use another method, computing the changes in net worth.

[7]      Another factor motivating her to use this method was the fact that all the income and expense amounts indicated by Ms. Richard in the income statement attached to her tax returns for 1996 and 1997 were rounded off. The gross income for 1996 was $15,000 and the expenses, totalling $10,000, were in multiples of $500 or $1,000. The gross income for 1997 was $16,180 and the total expenses were $11,820. Other than rental expenses of $2,520, all the expenses were rounded off to the nearest $100.

[8]      Another item that intrigued the auditor was the fact that Ms. Richard's declared net income declined constantly for each of the years, dropping from $5,000 in 1996 to $1,346 in 1998.

[9]      The calculations made by the auditor to determine the changes in net worth reveal an increase of $74,478 in Ms. Richard's assets, or an increase of $29,593 in 1996, $24,333 in 1997 and $20,552 in 1998. The unexplained changes in net worth were $32,627 in 1996, $32,197 in 1997 and $24,906 for 1998. Among the adjustments the auditor made to her calculations is a gift of $5,000 from Ms. Richard's grandmother in 1996 and a bequest of $13,485 received in 1998. At the objection stage, the Minister made a new adjustment to take into account an additional gift of $15,000 from Ms. Richard's grandmother. The amounts of undeclared income resulting from these adjustments are $17,241 for 1996, $34,529 for 1997 and $27,525 for 1998.

[10]     During negotiation of the partial consent, additional adjustments were made, decreasing the undeclared income to $14,890 for 1996, $22,538 for 1997 and $13,424 for 1998, which totalled $50,852 of undeclared income for this period. These adjustments included capital cost allowances of $2,361 for 1996, $258 for 1997 and $693 for 1998. The Minister also allocated additional car rental costs, so that the totals for rentals then became $7,822 for 1997 and $6,704 for 1998 respectively. For 1997, there is an additional adjustment of $15,599 as a capital gain. The amounts allowed as capital cost allowances are based on figures provided by a certified accountant hired by Ms. Richard.

[11]     During her audit, the auditor obtained certain documents from financial institutions, such as deposit slips indicating cash deposits totalling $37,300 made between February 1996 and July 1997, or over a period of approximately one and a half years. These deposits are $33,000 if the period is reduced to a year (February 1996 to February 1997).

[12]     Finally, among the evidence produced at the hearing is a deposit slip for a business that sold Ms. Richard a Harley-Davidson motorcycle on September 16, 1997, for a total price of $25,419; $1,000 of this was paid as a deposit at the time of purchase. According to the slip, the balance of the sale price was paid in cash on about March 13, 1998. If we add this cash amount to the $37,300 total mentioned above, we reach a grand total of cash deposits of $61,719!

[13]     The auditor explained her reasons for establishing the penalty with respect to the relevant period as follows: she deemed that the amounts of undeclared income determined by calculating the changes in net worth were significant amounts, especially compared with Ms. Richard's declared income. She had not declared all her income for each of the three years in the relevant period and Ms. Richard's only source of income was her professional activities.

[14]     Ms. Richard indicated that she became a member of the bar in 1993 and that she began her practice in her father's basement. It was not until 1995 that she rented a small, 300-sq.-ft. office for which she initially paid less than $300 per month, and then after that, approximately $300 per month. She confirmed that a large part of her practice was dedicated to family law. Eighty percent of her clients paid her advances of not more than $500. On overage, these advances were approximately $200.

[15]     During her testimony, Ms. Richard also indicated to the Court that she kept books in compliance with her obligations under An Act respecting the Barreau du Québec, specifically, that she kept a sheet for each of her clients which included the client's name, the amount of advances she might have received - which she deposited in a trust account - the amount of disbursements and the amounts billed. She also stated that she had a cash disbursements journal not only for her trust account but also for her general account. In the general account she entered all the information related to the expenses she incurred when exercising her profession. However, Ms. Richard did not produce any of these books. Nor did she deem it useful to have the syndic testify to corroborate her assertion that he had told her she was not required to provide information on her clients. She said that, on the list she gave to the auditor, she did not indicate client names, but she had indicated the plaintiff numbers corresponding to the legal proceedings undertaken on behalf of her clients and that she had also added the fees related to simple directions.

[16]     When she was cross-examined by Counsel for the Respondent with respect to her tax returns, specifically those for 1996 and 1997, Ms. Richard acknowledged that the amounts entered were estimates. She indicated that she went to the office of the Ministère du Revenu du Québec (MRQ) for help filling out these statements. She was allegedly told that she had to calculate her income by deducting, not her actual expenses, but the expenses incurred. However, when questioned about the fact that the amounts for telephone services were rounded off to $1,500, she was unable to provide an explanation. Her other answers were equally evasive.

Analysis

[17]     The classic decision with respect to the imposition of penalties and making assessments outside the normal period for reassessment is Venne v. Canada (Minister of National Revenue), [1984] F.C.J. No. 314 (Q.L.), which outlined the rule that holds that the burden of proof is on the Minister in these cases. Regarding the burden on the Minister with respect to the imposition of penalties under subsection 163(2) of the Act, there is this passage, which can be found at page 10 of 12 in the print version of Venne:

"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. . .

[My emphasis.]

[18]     With respect to the Minister's burden of proof regarding making an assessment outside the normal period for a reassessment, there is the following passage, at page 5 of the printed version, in which Strayer J. writes:

I am satisfied that it is sufficient for the Minister, in order to invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the words "misrepresentation that is attributable to neglects" must mean, particularly when combined with other grounds such as "carelessness" or "wilful default" which refer to a higher degree of negligence or to intentional misconduct. . . .

[My emphasis.]

[19]     I will first address the issue of penalties. In my opinion, the Minister has discharged his burden of proof with respect to their imposition. In my opinion, we must conclude that Ms. Richard neglected to include income in her tax return and that she did so under circumstances amounting to gross negligence. There is, here, a "high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not." The factors permitting me to arrive at such a conclusion are as follows. First, there is the fact that the undeclared income - income that Ms. Richard herself acknowledges in the consent to judgment - represents five times the amount of declared income: $50,852 in undeclared income, compared to a declared income of $10,706 during the relevant period. Furthermore, Ms. Richard's income statements produced as evidence reveal a definite degree of negligence or indifference on her part. The fact that she described her expense amounts, which were rounded off at $100 or $1000, as estimates, does not permit the conclusion that this is a person who is concerned with declaring her income in the appropriate manner.

[20]     Generally speaking, I do not give much weight to the syndic's statement in his discussion with Ms. Richard, as reported by her. This is obviously hearsay. Since there were no objections to them, these statements form part of the evidence. However, given that these statements have been reported and it is plausible that there may have been a misunderstanding with respect to the instructions given by the syndic, I cannot give much probative value to this piece of evidence. I would be greatly surprised to learn that the syndic of the Barreau du Québec is unaware of subsection 232(1) of the Act, which states that accounting records are not subject to lawyer-client privilege. There is also a great deal of jurisprudence that carries the same meaning.

[21]     In addition, I cannot imagine that the representatives of the MRQ could have told Ms. Richard that she could fill out an income tax return properly only using very approximate estimates of her expenses. Moreover, this is not what she said in her testimony.

[22]     Another piece of evidence which leads me to believe that Ms. Richard, on the balance of probabilities under circumstances amounting to gross negligence, neglected to declare all her income and that the practice of law was her primary source of income. It is therefore likely that her income came from that activity.

[23]     Another indicator is the size of the cash deposits over the two years from February 1996 to March 1998. First, recall that the largest deposit was the $24,419 Ms. Richard paid on the balance due on the Harley-Davidson. There are also the cash deposits totalling $37,300 made by Ms. Richard, in amounts varying from $100 to $10,000!

[24]     There is also the payment of the cost of the $60,000 condo purchased by Ms. Richard in March 1996. The purchase was financed through a $45,000 mortgage. We must assume that $15,000 was paid in cash out of Ms. Richard's financial resources, perhaps from the money given to her by her grandmother. Approximately 14 months later the mortgage loan was paid in full.

[25]     There is also the 1996 purchase of a BMW for $16,893, which was replaced by the lease of a new BMW in May 1997, at a cost of close to $5,000 per year. The lease contract required a deposit of $8,823. Thus, if we consider only the purchase of the BMW ($16,893[2]) and the motorcycle ($25,419 paid in cash in seven months) and the payment of $60,000 (in 14 months) for the condo, we note that this is a great deal of money for a person who declared only $10,000 in income over a three-year period.

[26]     Convinced that Ms. Richard earned much more professional income - almost five times greater - than she declared, I do not hesitate to conclude that she neglected to declare her income under circumstances amounting to at least gross negligence. Given my conclusion that the penalties are justified for the three years at issue, it goes without saying that the Minister also correctly made a reassessment for the 1996 taxation year. I am convinced that Ms. Richard, at the very least, made a misrepresentation that was attributable to neglect, carelessness or wilful default.

[27]     For all these reasons, Ms. Richard's appeal is allowed with costs to the Respondent and the assessments are referred to the Minister for a new review and reassessment, assuming that Ms. Richard earned additional income corresponding to the amounts indicated in the partial consent to judgment produced by the parties and that the Minister correctly made the assessment outside the normal period for a reassessment for 1996 and imposed penalties for the relevant period.

Signed at Ottawa, Canada, this 14^th day of June 2004.

"Pierre Archambault"

Archambault J.

Translation certified true

on this 10^th day of November 2004.

Shulamit Day, Translator

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