[OFFICIAL ENGLISH TRANSLATION]
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Docket: 2003-4443(IT)I |
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BETWEEN: |
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MICHEL LEFRANÇOIS, |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on August 24, 2004, at Québec, Quebec
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Before: The Honourable Judge Alain Tardif |
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Appearances: |
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Counsel for the Appellant: |
Christian Néron |
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Counsel for the Respondent: |
Emmanuelle Faulkner |
____________________________________________________________________
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1998, 1999 and 2000 taxation years is dismissed, with costs.
Signed at Ottawa, Canada, this 7th day of September 2004.
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"Alain Tardif" |
Tardif J.
Certified true translation
Colette Dupuis-Beaulne
[OFFICIAL ENGLISH TRANSLATION]
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Citation: 2004TCC587 |
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Date: 20040907 |
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Docket: 2003-4443(IT)I |
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BETWEEN: |
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MICHEL LEFRANÇOIS, |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal under the Income Tax Act (the "Act") concerning the 1998, 1999 and 2000 taxation years. The notices of assessment for the years concerned were made using the net worth method.
[2] The assessments dated September 22, 2003, for 1998, 1999 and 2000 are based on the following assumptions of fact:
[TRANSLATION]
UNREPORTED INCOME
(a) in his returns of income for the 1998, 1999 and 2000 taxation years, the Appellant reported the following total income:
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Year
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1998 |
1999 |
2000 |
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Total income |
$7,273 |
$8,326 |
$9,124 |
(b) during the taxation years in issue, the Appellant ran a business operating as Garage Michel Lefrançois (hereinafter the "business");
(c) during the taxation years in issue, the Appellant was the only person operating his business;
(d) the Appellant had been buying and selling vehicles for some 15 years;
(e) the Appellant did not bill his customers;
(f) an audit of the Appellant's income and expenditures was conducted by an auditor of the Minister for the 1998, 1999 and 2000 taxation years;
(g) the auditor chose to use the indirect audit method of calculating the difference in net worth for the following reasons:
(i) the bookkeeping and records were deficient;
(ii) significant assets had been purchased during the period audited relative to the low income reported by the Appellant;
(h) by the net worth method, the auditor determined that the Appellant had failed to include the following amounts in his returns of income for the 1998, 1999 and 2000 taxation years (see details in Schedule II):
[TRANSLATION]
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Description |
1998 |
1999 |
2000 |
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Net business income
Taxable capital gain
Total |
$19,395
0 $
$19,395
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$4,440
$13,500
$17,940
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$9,895
0 $
$9,895 |
Short-Term Assets
(i) the Appellant had two bank accounts, the balances of which at the end of each of the years were as follows:
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Description
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1997 |
1998 |
1999 |
2000 |
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Caisse populaire de l'Ange-Gardien
Caisse populaire de Beauport
Total |
$10,837
$1,396
$12,233
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$6
$843
$849
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$1,159
$2,262
$3,851
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$935
($10)
$925 |
(j) the Minister's auditor analyzed the transactions conducted in the Appellant's accounts;
(k) at the start of the audit, the Appellant told the Minister's auditor that he kept amounts of approximately $1,000 to $1,500 at home;
(l) the auditor therefore considered that he had cash on hand of $1,500 for each of the years 1997, 1998, 1999 and 2000;
(m) the auditor had no convincing reason to allow a larger amount of cash on hand for each of the years referred to in the previous paragraph;
Chris-Craft Boat
(n) in 1985, the Appellant bought a used Chris-Craft boat for $5,000;
(o) on March 26, 1999, the Appellant bought a 1989 Triple E - Regency C675X camper and assigned in return a trailer bearing the Chris-Craft boat;
(p) on the basis of the information provided, the Minister's auditor set the selling price of the boat at $23,000;
(q) the Minister's auditor determined a taxable capital gain of $13,500 [($23,000 - $5,000) x 75%];
(r) the Appellant mentioned that he himself had repaired the boat;
(s) the objections officer estimated the cost of the parts purchased to repair the boat at $9,000 and increased the adjusted cost base of the boat to $14,000;
(t) the taxable capital gain realized was thus determined to be $6,750 [($23,000 - $14,000) x 75%];
Chevrolet Pick-up Truck
(u) on June 4, 1997, the Appellant purchased a Chevrolet pick-up truck;
(v) the Minister's auditor estimated the cost of the truck at $23,000;
(w) the Appellant filed a copy of the truck purchase invoice with the objections officer;
(x) the objections officer increased the purchase price of the truck to $25,867 to take sales taxes into account;
(y) the truck was sold for $19,000 in 1999;
(z) a $4,000 loss was determined by the Minister's auditor;
(aa) based on the information provided to the objections officer, the loss incurred by the Appellant in 1999 was corrected to $6,867;
1994 Oldsmobile Car
(bb) on February 16, 1998, the Appellant bought a 1994 Oldsmobile car;
(cc) based on the information provided, the Minister's auditor estimated the cost of the car at $13,500;
(dd) the Appellant filed a copy of the car purchase invoice with the objections officer;
(ee) the objections officer increased the purchase price of the car to $14,953 to take sales taxes into account;
Triple E - Regency Camper
(ff) the Appellant purchased a 1989 Triple E - Regency C675X camper, the delivery date of which was March 26, 1999;
(gg) the Appellant paid the vendor $8,000 and assigned in return a trailer bearing the Chris-Craft boat, for which the vendor credited an amount of $20,999;
(hh) the Minister's auditor estimated the cost of the camper at $30,995;
(ii) the Appellant filed a copy of the camper purchase invoice with the objections officer;
(jj) the objections officer reduced the purchase price of the camper to $29,950 based on the information supplied by the Appellant;
(kk) on July 25, 2000, the camper was exchanged for a Catalina camper;
(ll) a $3,995 loss was determined by the Minister's auditor;
(mm) based on the information provided to the objections officer, the loss incurred by the Appellant in 2000 was corrected to $2,950;
1990 Catalina Camper
(nn) on July 25, 2000, the Appellant exchanged the 1989 Triple E - Regency camper for a 1990 Catalina camper;
(oo) the Minister's auditor set the purchase price of the Catalina camper at $27,000;
(pp) as the Appellant had paid the vendor $8,000 in addition to the Chris-Craft boat and trailer, for which the vendor had credited an amount of $20,999, the objections officer set the purchase price of the Catalina camper at $28,999;
Gasoline Expenses
(qq) on the basis of the information obtained, the Minister's auditor estimated the following amounts in respect of gasoline expenses for the various motor vehicles used by the Appellant for his personal use:
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Description
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1998 |
1999 |
2000 |
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1994 Oldsmobile S-10 Pick-up Chris-Craft boat Other Total |
$2,340 $609 $4,540 $ 0 $7,489
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$2,340 $148 $0 $2,080 $4,568
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$2,340 $0 $0 $3,580 $5,920 |
(rr) based on the additional information provided to the objections officer, the following amendments were made to the gasoline expenses stated in the previous paragraph:
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Description
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1998 |
1999 |
2000 |
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(Reductions) 1994 Oldsmobile Chris-Craft boat Other Total |
($3,210) ($2,270) $0 ($5,480)
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($3,210) $0 ($1,040) ($4,250)
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($3,210) $0 ($2,938) ($6,148) |
(ss) the facts stated in subparagraphs 30(s), (t), (w), (x), (aa), (dd), (ee), (ii), (jj), (mm), (pp) and (rr) were assumed for the first time when the reassessments of September 22, 2003, were made for the 1998, 1999 and 2000 taxation years.
FEDERAL PENALTIES FOR NEGLIGENCE
31. By the reassessments of February 22, 2002, the Minister assessed penalties under subsection 163(2) of the Act in respect of the additional income, established by the net worth method, of $19,395 for 1998 and $9,895 for 2000, for the following reasons:
(a) the unreported income of $19,395 in 1998 and $9,895 in 2000 was high enough relative to gross income that the Appellant could not plead ignorance of the omissions from his returns of income or the existence of any false statement;
(b) the reported income appeared relatively low compared to the Appellant's standard of living;
(c) although the Appellant did not have much knowledge of tax matters, he was in a position to inquire;
(d) the Appellant was the only person operating his business;
(e) the bookkeeping was virtually non-existent, and there was no filing system for the business, no sales invoices were issued, and most of the supporting documents for the purchase of automotive parts did not exist.
32. At the time of the reassessments of September 22, 2003, the penalties assessed under subsection 163(2) of the Act were reduced as a result of the changes made by the objections officer; they were therefore applied to the net income increases of $14,918 for the 1998 taxation year and $5,747 for the 2000 taxation year.
[3] The points for determination are, first, whether the Minister of National Revenue (the "Minister") was correct in adding the following amounts to the Appellant's income:
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1998 1999 2000 |
$14,918 $6,750 $5,747 |
[4] Second, the Court must determine whether the penalties were warranted.
[5] At the start of the hearing, counsel for the Appellant told the Court that the Appellant's evidence would focus mainly on the question of the cash on hand at the start of the period, that is, in 1997.
[6] The Appellant explained that, at that time, he had held approximately $107,328.71 in cash, consisting of the following items:
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Insurance indemnity as a result of his spouse's death
Term deposit held by his spouse
Cash in his possession: between $10,000 and $15,000
Various insurance indemnities paid in three instalments of $5,000, $27,221.84 and $21,000
Proceeds from the sale of land
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$5,006.87
$10,000.00
$15,000.00
$53,321.84
$24,000.00 |
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Total |
$107,328.71 |
[7] The Appellant then stated that he was a mechanics buff and had decided to treat himself to the vehicles he had always dreamed of. He had therefore acquired a number of assets, the cost of which is not here in issue.
[8] He explained that he had had to draw down the capital he had held at the start of the period in issue, that is, in 1997, to make his dreams come true, since his income was $7,273 in 1998, $8,326 in 1999 and $9,124 in 2000.
[9] As to his cost of living, he stated that he was not very demanding and was very moderate in his expenses, which he valued at $250 a week. He also mentioned that his girlfriend paid for him when they went out to a restaurant, that she had borne the acquisition cost of a cabin in 1996, and that she had also paid more than half of the garage expenses.
[10] Those were the essential points of the Appellant's testimony. I found the first part of that testimony quite convincing, it being based mainly on documents, that is, copies of the insurance indemnity cheques following his spouse's death, a copy of the term deposit that he held at the time of death, various insurance indemnity cheques as a result of the fire at his mobile home and a copy of the contract certifying the sale of the land on which the house destroyed by fire had stood. Matters deteriorated, however, when he explained his lifestyle, his passions, the modest nature of his personal expenses, and his girlfriend's extreme generosity.
[11] However, the enormous gap between the Appellant's conspicuous lifestyle (luxury vehicle, truck, boat, camper) and his income, which he advanced all kinds of fantastic explanations to say he had supplemented, seriously undermined the plausibility of those explanations of how he had used the insurance indemnities and other amounts he said he had possessed at the start of the period, that is, in 1997.
[12] The Respondent first stated that she did not agree with the valuation of cash on hand in 1997. She called Christine Verreault and Claude Rony, respectively auditor and appeals officer, as witnesses.
[13] First, Ms. Verreault explained that the audit had arisen from the finding that the Appellant had acquired a large number of assets, whereas his income was very modest. The unchallenged evidence revealed the acquisition of a residence, cars, a truck, a boat and a camper.
[14] Ms. Verreault said that she had had to proceed by the net worth method because there was a total lack of reliable data and it was impossible to proceed by the usual method.
[15] Not only did the Appellant not have adequate accounting, he systematically refused to cooperate in any way and took various steps to mislead and lie to the auditor. In particular, he misrepresented himself as another person and his girlfriend as his daughter. He even denied the obvious fact that he owned a boat.
[16] To illustrate the nature of the problems encountered during the audit, I think it useful to cite a passage from the report prepared by Ms. Verreault (Exhibit I-2):
[TRANSLATION]
[. . .]
I told him that I had seen an advertisement for a 1985 Chris-Craft for sale in the advertising invoices for the purchase of his vehicles. He told me that that was his boat. He wondered how I knew that he had a boat. I told him I had seen it in his invoices. He told me that must have been an invoice that was lying around. He explained to me that it was a boat that had belonged to one of his friends who had had an accident in the river. He had hit a shoal and the boat had taken on water. He said his friend had sold him the boat for $5,000 to $6,000 so that he would take care of it and repair it. Which is what he did, and he said he subsequently put it up for sale in 1998. Not being able to sell it to an individual, he said he decided to exchange it for a 1999 camper at Géant Motorisé. He told me he had owned that boat for 12 years and that he had used it at the time to travel a little with his friends (Lac St-Joseph, Lac Champlain, Sorel) but that gasoline expenses had been shared with the occupants every time. I asked him whether he had tied it up somewhere at a marina, and he told me that he had not, that he had stored the boat at the home of one of his friends in l'Ange-Gardien (Yvon Chouinard).
I asked to see the paper on which he had recorded the payments made to his sister-in-law. On it he had recorded instalments of $1,000 on October 31, 1995, $4,000 on July 10, 1996, $4,000 on August 2, 1997, $4,000 on August 15, 1998, $4,000 on September 10, 1999, and, lastly, $4,000 on June 11, 2000. He told me that he had no invoices for the renovations because they had done virtually all of them themselves with friends and that I would find no invoices for 1997 and subsequent years since everything had been done well before that.
I asked him whether he had found invoices for purchases of his motor vehicles. He told me he had not and that he had checked with Cécil Bilodeau, a dealer, but that they had nothing about that because they had all been lost in the fire. He mentioned to me that his Oldsmobile Regency had been bought in February 1998 for $13,500 (taxes included without exchange) and paid for in cash with insurance money. He said his pick-up was bought in March 1997 for $21,000 (taxes included without exchange) and paid for in cash with the insurance money. He said he had kept it for a year and sold it to an individual in 1998 for $19,000. He told me that that truck had been bought to transport his boat, but that he had decided to sell it.
I explained to him that we were going to look at the estimate of his lifestyle because it did not appear to correspond to his reported income. He told me that he lived on the income from his insurance. I told him that we were nevertheless going to estimate his cost of living. He told me he knew how that worked, that I was going to ask him how much it cost him to live. I told him that was what we wanted to estimate.
He estimated $75 a week for food and $30 a month for restaurants. He often spoke to me about Gisèle, who brought him prepared meals (submarine sandwiches, Chinese food, etc.). For housing, I told him I had nearly all the expenses, the principal paid to his sister-in-law every year, the hydro bills (he had oil heating for his garage and residence), the Bell bills, and municipal and school taxes. I asked him whether he was still with Desjardins for home insurance. He told me he was with AXA Assurances for everything. He communicated with Michel Boutin, who confirmed for him the following premiums for the last year: his motor home ($448), the Pontiac Sunbird ($256), his Oldsmobile ($403), and the residence ($303). We estimated $200 a year for clothing. He told me that his daughters and Gisèle had bought him most of his clothing.
As to his vehicles, for his Oldsmobile (123,000 to 157,000 km travelled since the purchase in 1997), he estimated two fill-ups, that is, two times $45, maintenance and repairs at $100 (parts purchased at scrapyards), and registration at $250. For his motor home, maintenance at $100, registration at $425. For his second motor home purchased in 2000, he told me he had not had to pay anything because the owner had taken it back in view of the old vehicle's operating problems. He said he was friendly with the owner of Géant Motorisé St-Ambroise.
As for health care, Mr. Lefrançois paid nothing for glasses or dental work. As for medication, he takes medication (anti-inflammatories) from his brother who is an invalid. He said toiletries represented approximately $30 a year.
Mr. Lefrançois admitted to me that he had lied when I called his residence in April. He told me I had never spoken to his brother and that he did not live at his home, but came only two or three days, no more. He also told me that he had not wanted to go and pick up the letter from the post office because he believed it was someone to whom he had sold the car and who wanted to take him to small claims court. He told me that it scared him and that he wanted to run away. He told me he knew that I took him for a liar and he wanted to tell me the truth. He told me he was aware that I had realized all that.
With regard to recreation, he told me he went fishing at the cottage of Gisèle's mother and that that cost approximately $50 in gas and $75 in groceries. He goes there approximately five times a year. He pays dues of $45 a year to the Fédération des Campeurs. As for his boat, he mentioned $600 in gas to go to Sorel (he told me it consumes 12 gallons an hour). He goes to his daughter's campground in his motor home and that costs him $20 for five gallons of gas. He told me that he went to his brother's home in North Carolina in 1999, but that that had only cost him $150 with his motor home and that he had stayed with his brother for 15 days. He told me he had lent his credit card to his brother, who went to Daytona once, but that that was the only time and that he himself had not gone there. He told me he was not in the habit of using his car and that it was just for emergencies. He is used to paying for everything in cash, and he told me he did not like leaving a trail behind him.
He told me he gives approximately $45 to $50 in gifts to each of his daughters each year and $100 to Gisèle. He told me that Gisèle gives him a lot of gifts. There is a dog at the house. He told me that was for Gisèle and that she cannot keep it in her apartment, but that she pays for it (food, veterinarian, etc.). Mr. Lefrançois told me that he buys a case of 24 beers every two weeks and six or seven bottles of wine a year.
[17] The net worth method is never the ideal assessment method since, by its very nature, it must involve using essentially arbitrary figures. However, a person who is assessed in this manner can provide explanations and justifications to refute and challenge the components of such an assessment through documents, testimony and other means.
[18] Failing documents and testimony by credible persons duly informed on the points at issue, the credibility of the person concerned by such an assessment is of decisive importance.
[19] In the instant case, on the evidence as a whole, I lend no credence to the Appellant, whose testimony was a patchwork of fabrications and gross lies.
[20] He tried to discredit the auditor by insinuating that she had lied to him, that she had not identified herself and, what is even more surprising, that she had frightened him.
[21] However, he lied to her shamelessly about his identity, passing himself off as his brother and saying that the person concerned by the audit worked outside at a place that he could not indicate. He provided a number of utterly contradictory explanations about the substantial amounts received. His first version was that he had made major repairs and improvements to his residence. He told the Court that he had simply cashed the amount in order to keep it cash at his home.
[22] After offering to show the auditor a large sum of money that he kept in cash at his home, he changed his mind and never agreed to do so.
[23] He admitted that he had not attended to the registered mail that had been sent to him because, as a seller of cars worth $500 to $1,000, he must often have been the object of claims in small claims court; the experience had taught him not to pick up his mail and that stratagem had spared him a lot of problems.
[24] To justify the $40,000 withdrawal from the bank, he said that he did not trust the banks since his account had previously been emptied without his knowledge. He also said that he had no need of the residence, but that he had bought it for his girlfriend. He spoke of minor repairs that he had done himself with friends. As a result, the explanation, given to the auditor, that he had withdrawn $40,000 for major repairs no longer stood at the hearing. The repairs had diminished in magnitude and the withdrawal had remained in cash and been kept at home.
Penalties
[25] The penalties assessed are warranted on the evidence as a whole. The weight of the evidence is that the Appellant is not only a person wholly indifferent to his tax liabilities, but also one who deliberately does everything he can to avoid them. He pays in cash, keeps no documents, and displays a disturbing ability to fabricate explanations to explain the inexplicable.
[26] In connection with the audit of his file, the Appellant made false and misleading statements on a number of occasions and systematically refused to cooperate. The audit work was a laborious process. It is obvious to me that the Appellant deliberately chose to live and to organize his affairs so as to avoid paying any tax.
[27] I am moreover convinced that the assessments issued were probably well below what they should have been.
[28] The persons who conducted the audit, analysis and revision did a professional, judicious and impeccable job given the numerous constraints and barriers the Appellant raised for them.
[29] For all these reasons, I confirm the merits of the reassessments issued and determine that the penalties assessed were entirely warranted.
[30] The appeal is subsequently dismissed, the whole with costs.
Signed at Ottawa, Canada, this 7th day of September 2004.
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"Alain Tardif" |
Tardif J.
Certified true translation
Colette Dupuis-Beaulne
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CITATION: |
2004TCC587 |
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COURT FILE NUMBER: |
2003-4443(IT)I |
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STYLE OF CAUSE: |
Michel Lefrançois v. Her Majesty the Queen |
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PLACE OF HEARING: |
Québec, Quebec |
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DATE OF HEARING: |
August 24, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Alain Tardif |
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DATE OF JUDGMENT: |
September 7, 2004 |
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APPEARANCES: |
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For the Appellant: |
Christian Néron |
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For the Respondent: |
Emmanuelle Faulkner |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Christian Néron |
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City: |
Québec, Quebec |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |