Tax Court of Canada Judgments

Docket: 2001-2720(IT)G

BETWEEN:

91633 CANADA LTÉE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

[OFFICIAL ENGLISH TRANSLATION]

_______________________________________________________________

Appeals heard with the appeals of Michel Hébert (2001-2721(IT)G)

on May 12, 2004, at Montreal, Quebec

Before: The Honourable Judge Paul Bédard
Appearances:
Counsel for the Appellant:	Serge Fournier
Counsel for the Respondent:	Nathalie Lessard

_______________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1992, 1993, 1994, 1995, and 1996 taxation years are dismissed, with costs, in accordance with the attached Reasons for Judgment.

The Respondent is entitled to one set of costs.

Signed at Quebec City, Quebec, this 13^th day of December 2004.

Bédard J.

Translation certified true

on this 18^th day of July 2005.

Colette Dupuis-Beaulne, Translator

Docket: 2001-2721(IT)G

BETWEEN:

MICHEL HÉBERT,

Appellant,

And

HER MAJESTY THE QUEEN,

Respondent. [OFFICIAL ENGLISH TRANSLATION]

_______________________________________________________________

Appeals heard with the appeals of 91633 CanadaLtée (2001-2720(IT)G)

on May 12, 2004, at Montreal, Quebec

Before: The Honourable Judge Paul Bédard
Appearances:
Counsel for the Appellant:	Serge Fournier
Counsel for the Respondent:	Nathalie Lessard

_______________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1992, 1993, 1994, 1995, and 1996 taxation years are dismissed, with costs, in accordance with the attached Reasons for Judgment.

The Respondent is entitled to one set of costs.

Signed at Quebec City, Quebec, this 13^th day of December 2004.

Paul Bédard"

Bédard J.

Translation certified true

on this 18^th day of July 2005.

Colette Dupuis-Beaulne, Translator

Citation: 2004TCC760

Date: 20041213

Docket: 2001-2721(IT)G

BETWEEN:

MICHEL HÉBERT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent, AND BETWEEN: Docket: 2001-2720(IT)G 91633 CANADA LTÉE, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION]

REASONS FOR JUDGMENT

Bédard J.

[1]      These appeals were heard together under the general procedure. The years at issue are the 1992 to 1996 taxation years. Company 91633 Canada Ltée (the "Appellant 91633") operated game rooms during the years at issue in the cities of Laval, Sainte-Thérèse, and Châteauguay. Mr. Michel Hébert (the "Appellant Hébert") held all of the shares in the Appellant 91633 during these years, directly or indirectly. The issue lies mainly with the expenses relating to the Appellant Hébert's use of high-priced sports recreational vehicles that the Appellant 91633 owned or leased during the years at issue. The Minister of National Revenue (the "Minister") disallowed all of the Appellant 91633's expenses claimed in the calculation of its business income for the years at issue with respect to these recreational vehicles for the following reasons: these expenses were not connected to the business, they were not incurred for the purpose of earning business income, and they were essentially personal expenses incurred by the Appellant Hébert that the Appellant 91633 assumed. However, the Appellants maintained that, by affixing the Appellant 91633's company name or trademark to these recreational vehicles, and by taking part in various sports shows, exhibitions, and events with these vehicles, they targeted enthusiasts of these activities and increased the Appellant 91633's income.

[2]      Through reassessments, the Minister added $36,280, $52,743, $109,213, $141,196, and $86,011 to the Appellant 91633's income for the 1992, 1993, 1994, 1995, and 1996 taxation years, respectively. A summary of the adjustments necessary further to these reassessments are attached and identified as Appendix A. Also through these reassessments, the Minister imposed penalties under subsection 163(2) of the Income Tax Act (the "Act") on the Appellant 91633 in the amounts of $6,339, $3,176, and $1,082 for the taxation years ended on October 31, 1994, 1995, and 1996, respectively.

[3]      Through reassessments, the Minister added $36,280, $58,057, $102,728, $107,532 and $83,466 to the Appellant Hébert's income for the 1992, 1993, 1994, 1995, and 1996 taxation years, respectively. The summary of the adjustments necessary further to these reassessments are attached and identified as Appendix B. Also through these reassessments, the Minister imposed penalties under subsection 163(2) of the Act on the Appellant Hébert in the amounts of $102, $1,099, $2,837, and $867 for the 1993 to 1996 taxation years, respectively.

[4]      The Appellant 91633 is challenging the Minister's refusal to allow the deduction of the following expenses from the computation of its business income:

	1992	1993	1994	1995	1996
Exhibitions and rental	$36,280	$40,053	$37,560	$48,461	$26,212
Depreciation of vehicles		$3,746	$11,362	$15,198	$20,032
Insurance and alarms		$424	$4,790	$2,521	$2,181
Travel expenses		$8,520	$34,069	$7,040	$773
Advertising			$2,530	$900	$2,967
Interest charges			$1,676	$3,100	$4,433
Labour				$5,439
Equipment maintenance and repairs					$21,644
Trip				$11,337

[5]      The Appellant Hébert is challenging the addition of the following amounts to his income, which the Appellant 91633 had claimed as expenses:

	1992	1993	1994	1995	1996
Exhibitions and rental	$36,280	$40,053	$37,560	$48,461	$26,212
Advertising		$2,529	$900		$2,967
Depreciation of vehicles		$3,746	$11,362	$15,198	$20,032
Insurance and alarms		$424	$4,790	$2,521	$2,181
Travel expenses		$8,520	$34,069		$773
Interest charges			$1,676	$3,100	$4,433
Equipment maintenance and repairs				$1,644	$20,000
Labour				$5,439
Trip			$2,130	$9,207

[6]      The Appellant 91633 is challenging the penalty imposed by the Minister under subsection 163(2) of the Act with respect to unreported income of $13,500 for the 1995 taxation year and with respect to the trip expenses of $11,337 that were disallowed by the Minister for the same year. The Appellant Hébert is challenging the penalty imposed by the Minister under subsection 163(2) of the Act with respect to the trip expenses of $11,337 disallowed the Appellant 91633 for the 1995 taxation year and added to the Appellant Hébert's income for the 1994 ($2,130) and 1995 ($9,207) taxation years.

[7]      The issues at bar are as follows:

(i)       Were the expenses claimed by the Appellant 91633 incurred for the purpose of earning business income? Were these expenses personal expenses of the Appellant Hébert?

(ii)       Were the expenses claimed by the Appellant 91633 incurred for the purpose of earning business income? Were they reasonable?

(iii)      Was the Respondent's application of the penalty set out in subsection 163(2) of the Act, with respect to the amounts identified in the preceding paragraph, justified?

(iv)      Was the Respondent's reassessment of the Appellant 91633 for the taxation years ended October 31, 1992, and October 31, 1993, after the normal reassessment period for these years, justified?

(v)      Was the Respondent's reassessment of the Appellant Hébert for the 1992 and 1993 taxation years, after the normal reassessment period for these years, justified?

Appellants' evidence

[8]      The Appellants' evidence relied essentially on the testimony of the Appellant Hébert. Moreover, in support of their claims, the Appellants filed in evidence the following exhibits: photographs of a number of the Appellant 91633's and the Appellant Hébert's vehicles (Exhibits A-1 to A-5, A-7, and A-12), a photocopy of a cheque made out to Richard Lacroix, drawn from the Appellant 91633's bank account and a photocopy of a receipt for the same amount (Exhibit A-6), and two expert reports on the effectiveness of the advertising methods used by the Appellant 91633 (Exhibits A-9 and a-11). Mr. Michel Davignon and Mr. Laurent Genest also testified in their capacity as expert, for the Appellants.

[9]      The Appellant Hébert was the president of the Appellant 91633. The Appellant 91633 operated game rooms known as "Amusement 222." The Appellant Hébert claimed that all of the Appellant 91633's game rooms contained video games and pool tables, and some of them had a bar. He explained that some of the video games that were imported from the United States and Japanwere very sophisticated and could cost up to $90,000 each. The first game room operated by the Appellant 91633 opened for business in May 1977. This room was located at 222 Lévesque Blvd. in Laval, hence the name "Amusement 222."

[10]     The Appellant Hébert also explained that the Appellant 91633's targeted client base was families, given that only 50% of its clients were under 25 years old. The objective was to attract the clients of the La Ronde amusement park to the Appellant 91633's game rooms during the periods in which La Ronde was closed. According to the Appellant Hébert, the Appellant 91633 sought to attract people from all regions of Quebecto its game rooms.

[11]     To reach recreational vehicle enthusiasts, the Appellant 91633 acquired a number of these vehicles. The Appellant Hébert participated in various exhibitions and activities organized for enthusiasts of these vehicles to distribute pamphlets and discount coupons. During the years at issue, the Appellant 91633 leased from the Appellant Hébert a Fountain racing boat (the "boat") and owned two Dodge Vipers (the "Vipers"), two personal watercrafts, two snowmobiles, a Harley-Davidson motorcycle (the "Harley-Davidson"), an autocross vehicle, and a Formula Ford 1600 ("Formula 1600"). The Appellant 91633 also owned a vehicle made by Mercedes (the "Mercedes") and a Jeep Cherokee sports utility vehicle (the "Jeep").

[12]     The Appellant Hébert purchased the inboard racing boat in 1989 for $200,000 and leased it to the Appellant 91633 during the years at issue. The boat was named the "Amusement 222" starting in 1989. According to the Appellant Hébert, the boat was only used for 450 hours. The Appellant Hébert testified that he had never used the boat for personal enjoyment.

[13]     Except when it was used to participate in Poker Run boat races, the boat was mounted on a trailer at the Lavalgame room. The Appellant Hébert stored the boat beginning in October. During the years at issue, the boat was seen in a number of Quebeclocations, including Saint-Hyacinthe, Ville Lasalle, Mille-Îles, Québec, and Trois-Rivières during activities in which the Appellant Hébert was participating. In his testimony, the Appellant Hébert stated that he also used the boat to participate in two races per year-one in Montréal and one in Mille-Îles.[1] The boat was also launched for special occasions, such as the water activities day organized by police officers in the area.

[14]     The Appellant Hébert claimed that the Appellant 91633 always had the nicest recreational vehicles and the largest booths at trade shows and fairs. According to the Appellant Hébert, his participation in these races and exhibitions drew interest, because the spectators wondered about the meaning of "Amusement 222," as inscribed on the boat. By answering their questions, the Appellant Hébert could provide information about the Appellant 91633's game rooms.

[15]     From 1989 to 2002, the Appellant Hébert owned his own pleasure craft. He maintained, therefore, that he did not use the Appellant 91633's leased boat for personal use.

[16]     The Appellant Hébert explained that the Viper was a huge success when it was introduced in 1994. The Appellant Hébert felt that it would be to the benefit of the Appellant 91633 to own such a vehicle to attract potential clients. The Viper had been on display in one of the game rooms during the winter. The Appellant Hébert claimed that he was given a competitive price when he bought the Viper-$74,000-which justified the purchase.

[17]     The Appellant 91633 placed the "222" logo on the hood of the Viper. According to the Appellant Hébert, the public referred to the Appellant 91633's game room as "222" (for example, the 222 in Laval). For this reason, it was not necessary to place any further identification on this vehicle.

[18]     According to the Appellant Hébert, the Viper went everywhere the boat went, because all of the Appellant 91633's recreational vehicles travelled together. These were important attractions, because people wanted to be photographed with the Viper. The Viper was also used to collect funds for charitable organizations, such as the Children's Wish Foundation. The Appellant Hébert testified that in exchange for publicity, the Appellant 91633 had loaned out the Viper for the television series "Omertà" and to CKOI, a radio station, and that he had participated in the Lachine Mardis Cyclistes with the Viper.

[19]    The Appellant Hébert claimed that after ten years of use, the Viper had travelled only 25,000 kilometres. The Appellant Hébert maintained that he never drove the Viper for personal use. However, the Appellant Hébert acknowledged that he drove home in the Viper when the activities in which he was participating ended at a late hour.

[20]     The Appellant 91633 acquired the two personal watercrafts in 1996. When these personal watercrafts were sold in July 2003, each one had been used for forty hours. The personal watercraft could also be seen wherever the boat travelled. "Amusement 222" was written on the outside of each watercraft.

[21]     The Appellant 91633 acquired the two snowmobiles in 1994; "Amusement 222" was indicated on both. The Appellant Hébert explained that the snowmobiles were to be used to promote the Appellant 91633's game rooms to winter sports enthusiasts. The snowmobiles were never used for racing, hence the low mileage; one machine has 800 kilometres on it, and the other, 1,500 kilometres.

[22]     The Appellant 91633 acquired the Harley-Davidson in 1993 to attract motorcycle enthusiasts. According to the Appellant Hébert, the mileage (1,100 km) on the Harley-Davidson since its acquisition results from rallies or activities staged to raise funds for the Children's Wish Foundation. The Appellant Hébert maintained that the Appellant 91633's participation in these events generated excellent publicity for the Appellant 91633. The "222" trademark appeared on the Harley-Davidson's fuel tank. In addition to being displayed outside a number of the Appellant 91633's game rooms, the motorcycle could be seen everywhere the Appellant Hébert travelled with the boat.

[23]    The Appellant Hébert could not specify the year in which the Formula 1600 was purchased; he claimed it was purchased between 1993 and 1995. The Formula 1600 was owned by the Appellant 91633, but it was driven by a Châteauguay area driver. The Appellant Hébert explained that the Appellant 91633 sold this vehicle because maintenance costs were too high. However, the Appellant Hébert maintained that the Formula 1600 had given the Appellant 91633 additional exposure, because the races it had participated in were held on Sundays, just before the Formula 1 races. The Appellant Hébert would meet with the spectators in the paddocks[2] where he could promote the Appellant 91633's game rooms.

[24]     The Appellant 91633 also owned a vehicle made by Mercedes that the Appellant Hébert used in the course of performing his duties. This vehicle was used in the summer only, because the Appellant 91633 stored the Mercedes from late September to late April. The Mercedes was purchased in 1991, and the Appellant 91633 still owned it. According to the Appellant Hébert, it was easier for the Appellant 91633 to obtain financing from financial institutions because of the fact that its president drove a Mercedes.    Moreover, the Appellant Hébert felt that the Mercedes was a wiser purchase, given the resale value for this type of vehicle. There was no identifying inscription on the Mercedes.

[25]     During the years at issue, the Appellant 91633 also owned a Jeep Cherokee sport utility vehicle. The Appellant Hébert drove the Jeep during the winter months; there was an identifying inscription on it. Note that, at the outset, the Appellant 91633 leased both the Mercedes and the Jeep. The Appellant 91633 later purchased the Mercedes.

[26]     During the years at issue, the Appellant Hébert explained that he personally owned a sport utility vehicle, a Cobra sports car, a thirty-four foot boat with two bedrooms, all terrain vehicles, a dune buggy, and a Honda motorcycle.

[27]     The Appellant Hébert maintained that the purchase of all these recreational vehicles had a considerable effect on the Appellant 91633's sales figures; these figures rose from $800,000 in the early 1990s to approximately $20 million in 2002. The Appellant Hébert did not, however, consult with an advertising professional before purchasing these vehicles. The Appellant 91633 also used more conventional advertising methods, such as advertisements in local newspapers and on the radio.

[28]     The purpose of the expert report (Exhibit A-9) prepared by Gagné, Saya, Genest, Lacroix, chartered accountants, (the "Genest report") was to demonstrate the effectiveness of the advertising methods used by the Appellant 91633. Mr. Genest, the Appellant 91633's external auditor, testified for the Appellants as an expert with respect to this report. The purpose of his first analysis, based on income per square foot, was to demonstrate that the constant increase in the income of "Groupe Amusement 222" [3] was owing to the Appellant 91633's use of its advertising vehicles. The purpose of the second analysis, which consisted of comparing the data for "Groupe Amusement 222" with the average in this industry sector, was to demonstrate that the Appellant 91633 and the members of "Groupe Amusement 222" were above the industry sector average with respect to revenues, net profit, and various financial indicators. Mr. Genest concluded that the constant increase in the revenues of "Groupe Amusement 222" and its performance, which was far superior to the average in this industry sector, resulted from the Appellant 91633's advertising strategy.

[29]     The purpose of the expert report (Exhibit A-11) prepared by Chrono Communication Marketing and Stratégem (the "Stratégem report") was to demonstrate that the Appellant 91633's advertising activities were comparable to outdoor advertising. Mr. Davignon testified as en expert with regard to this report. He maintained that the advertising value resulting from the presence of advertising vehicles during an event was equal to the cost of billboard advertising capable of reaching the same number of people as the number who attended the event. He concluded that the cumulative advertising value of the Appellant 91633's advertising vehicles was approximately $130,000. However, I feel that it is important to point out that the largest portion of this value ($106,566) was related to the use of the Viper and that $104,400 of this amount was related to a mention on television in relation with the Mardis Cyclistes de Lachine ($87,400), and product placement in the televised series Omertà ($170,004).    

Cross-examination of the Appellant Hébert

[30]     The Appellant Hébert explained that he was the sole shareholder of the Appellant 91633 until July 1, 1993. On that date, he sold his shares to 2896761 Canada Inc., for which he was also the sole shareholder. The Appellant Hébert was the director of the Appellant 91633 during the years at issue. The Appellant 91633 operated game rooms during the years at issue in Laval, Sainte-Thérèse, and Châteauguay. He testified that he held 50% of the shares indirectly in Centre Récréatif 222 Inc., which operated a game room in Saint-Constant and 50% of 2736900 Canada Inc. and 3081788 Canada Inc., which operated game rooms under the company name "Amusement 222 Plus" in Longueuil and Ville Lasalle. He added that other parties held the other 50% of these companies.

[31]     The Appellant Hébert also admitted that he owned only one of the infamous video games imported from the United States. However, the Appellant Hébert explained that he would move this game from one location to another when the machine would stop generating profits in the location in which it was installed.

[32]     When asked whether there were any bars in the Appellant 91633's game rooms, the Appellant Hébert answered that there were. During his examination for discovery, the Appellant Hébert claimed the opposite.[4] Also during his examination for discovery, the Appellant Hébert stated that youth under 16 years of age were not admitted to the Appellant 91633's game rooms. At the hearing, the Appellant Hébert changed his testimony, stating that youth under 16 years of age had to be accompanied by an adult to play pool.[5]

[33]     The Appellant Hébert specified that the warehouse in which the Appellant 91633 stored the Viper and the Mercedes for the winter was the garage at his personal residence.[6] The Appellant Hébert also specified that the Appellant 91633 now owned two Vipers. The second was a later model, purchased in 1997 for $87,000.

[34]     The Appellant Hébert acknowledged that the Appellant 91633 requested an expert report on its advertising methods only further to an audit performed by the Canada Customs and Revenue Agency ("CCRA").

[35]     Counsel for the Respondent questioned the Appellant Hébert about the relevance of having an extended warranty for some of the recreational vehicles, such as the snowmobiles and the personal watercrafts, given that they were only used for display purposes. The Appellant Hébert explained that at the time these vehicles were purchased, he could not know that the vehicles would be used so infrequently. He added that the extended warranty for the personal watercrafts did not give rise to any additional expenses for the Appellant 91633.

[36]     During cross-examination, the Appellant Hébert stated that he did not remember whether he had participated in the Georgian Bay Poker Run in 1994.[7] During the examination for discovery, the Appellant Hébert stated: [Translation] "I tried it out and I may have spent the weekend at a poker run, or something like that."[8]    When the Appellant Hébert was confronted with his previous statement, he claimed that he did not remember the events, because he participated in two to five races per year.[9] The Appellant Hébert had previously claimed that he only participated in two races per year with the boat.[10] In addition, in the examination for discovery,[11] the Appellant Hébert claimed that he was the only person to drive the boat prior to 2000. After that time, a Mr. Rousseau participated in the races in his place, because the Appellant Hébert had experienced heart problems in 2000, and he had to reduce his activities. In spite of this, the Appellant Hébert eventually admitted that Mr. Rousseau had driven the boat well before 2000[12] and that he, himself, had participated in at least one race with the boat after he had experienced heart problems.[13]

Testimony of Mr. Lamarche

[37]     Raymond Lamarche testified for the Respondent. Mr. Lamarche is the audit manager at the CCRA's Tax Services Office in Laval. At the time of the audit,

Mr. Lamarche was acting as the team leader for Ms. Lise Gauthier, who was the auditor in the Appellants' cases. Ms. Gauthier was absent from the hearing for medical reasons. However, Mr. Lamarche stated that he had personal knowledge of the Appellants' cases.

[38]     Essentially, the expenses claimed by the Appellant 91633 were disallowed for one of the following reasons: lack of supporting documents or expenses deemed to be of a personal nature. For example, the Appellant 91633 claimed expenses relating to the Mercedes, the Jeep, and the Viper. The CCRA deemed the use of three vehicles to be unreasonable for the various business trips required by the Appellant 91633. Because each of the vehicles was used for both business and personal purposes by the Appellant Hébert, the CCRA allowed the deduction of one third of the expenses relating to each of these vehicles.

[39]     Mr. Lamarche summarized the assessments issued to the Appellants as follows. The expenses relating to trips to the Dominican Republic were disallowed for lack of supporting documents. The expenses relating to the boat were deemed to be of a personal nature, because the Appellant Hébert participated in races held far from the Appellant 91633's places of business. The expenses relating to the personal watercrafts, snowmobiles, the Formula 1600, the autocross vehicle, and the motorcycle were deemed to be personal expenses, given the lack of documentary evidence to show that these vehicles had genuinely been exhibited during trade shows, exhibitions, and other similar events. In addition, the expenses relating to these vehicles were deemed to be of a personal nature, because the vehicles did not bear a sufficiently apparent inscription, and because they fulfilled the Appellant Hébert's passion for these vehicles. The expenses relating to the three passenger vehicles were allowed in part only, because they were deemed to be unreasonable.

[40]     Mr. Lamarche also stated that he attended Mardis Cyclistes on two occasions in 1998 and the Grand Prix to observe the Appellant 91633's vehicles. He maintained that it was difficult, if not impossible, to see the "Amusement 222" or "222" inscription on the vehicles. Mr. Lamarche maintained that no pamphlets had been distributed during Mardis Cyclistes. He added that he heard no mention of the Appellant 91633's business during these events, nor during the news bulletins that followed them. Finally, Mr. Lamarche watched the television series "Omertà," and he found that no advertising for the "Amusement 222" game rooms were visible during the program or in the credits.   

[41]     During his cross-examination, Mr. Lamarche admitted that he had never seen the red Viper himself-the Viper acquired in 1994-the boat, the personal watercrafts, or the snowmobiles. Furthermore, Mr. Lamarche stated that he did not see the Formula 1600 in the paddocks, because he did not have access to this area. Mr. Lamarche acknowledged that the expert opinion presented by the Appellant 91633 was prepared after the audit, and with the CCRA's knowledge. The CCRA had asked the Appellant 91633 to support these advertising expenses with an expert report, which the Appellant 91633 provided.

[42]     In June, the Respondent filed into evidence the expert report prepared by Mr. François Taschereau (Exhibit I-14), who, at the time, worked for National Inc., a public relations firm. Mr. Taschereau also testified for the Respondent. The findings and conclusions of this report and Mr. Taschereau's testimony can be summarized as follows:

(i)       Displaying the company name or logo does not constitute an acceptable manner of increasing the sales figures of a business, except in exceptional cases involving very well-known trademarks, such as Nike, where the logo itself can constitute a message. However, the report noted that the recognition of this logo results from a wide-scale advertising campaign carried out over a number of years.

(ii)       Advertising does not necessarily give rise to recognition where the industry sector and location of the business is unknown. This report noted that, only in a sponsorship plan containing additional components (signs and pamphlets, for example), would the presence of the publicity vehicles be likely to produce a level of recognition of the Appellant 91633's logo likely to increase attendance at its game rooms.

(iii)      Regarding Mardis Cyclistes de Lachine, Mr. Taschereau noted in his report that the Stratégem report provided very little information on this subject, except to discuss the mention of the company in news bulletins on the TVA, SRC, CFCF, and RDS networks and that he would have needed to see excerpts from these news programs in order to issue an opinion in this matter.

(iv)      With respect to the television series "Omertà," Mr. Taschereau pointed out that, because the Appellant 91633's logo did not appear on the Viper, it constituted product placement for the manufacturer of the vehicle, not for the Appellant 91633. Mr. Taschereau testified that, by watching an episode of the television series "Omertà," he was able to confirm that the mane of the Appellant 91633 did not, at any time, appear in the program.

(v)      Finally, the report concluded that except for displaying the vehicles in front of the Appellant 91633's game rooms, the Stratégem report did not contain the information required to support the expenses incurred by the Appellant 91633.

Analysis

[43]     The first question I need to answer is the following: Did the Appellant 91633 incur or make the expenses for the purpose of earning business income? Paragraph 18(1)(a) of the Act stipulates that in computing the income of a taxpayer from a business or property, an expense may be deducted only to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. In Symes v. Canada,[14] at page 738, the Supreme Court found as follows with respect this tax provision:

[...]I note that in a tax system which is at least partly geared toward the preservation of vertical and horizontal equities ("[h]orizontal equity merely requires that `equals' be treated equally, with the term `equals' referring to equality of ability to pay" and "vertical equity merely requires that the incidence of the tax burden should be more heavily borne by the rich than the poor": V. Krishna, "Perspectives on Tax Policy" in Essays on Canadian Taxation, supra, at pp. 5 and 6-7), one seeks to prevent deductions which represent personal consumption. To the extent that a taxpayer can make a lifestyle choice while maintaining the same capacity to gain or produce income, such choices tend to be seen as personal consumption decisions, and the resultant expenses as personal expenses.

[44]     Therefore, the purpose of this tax provision is to prevent the deduction of expenses incurred or made for a purpose other than earning business income, to ensure fairness among all Canadian taxpayers. It should be noted that the initial intention to earn business income need not be the main reason for the expense. A secondary intention is sufficient.

[45]     In the same case,[15] at page 736, the Supreme Court specified how the purpose should be determined:

As in other areas of law where purpose or intention behind actions is to be ascertained, it must not be supposed that in responding to this question, courts will be guided only by a taxpayer's statements, ex post facto or otherwise, as to the subjective purpose of a particular expenditure. Courts will, instead, look for objective manifestations of purpose, and purpose is ultimately a question of fact to be decided with due regard for all of the circumstances. For these reasons, it is not possible to set forth a fixed list of circumstances which will tend to prove objectively an income gaining or producing purpose.

[46]     In Corporation municipale des Cantons Unis de Stoneham et Tewkesburyv. Ouellet, Beetz J. said the following:[16]

In a civil proceeding, where the rule is that of a preponderance of the evidence and the balance of probabilities, when a party testifies and is not believed it is possible for the trial judge to regard his assertions as denials and his denials as admissions, taking into account contradictions, hesitations, the time the witness takes to answer, his expression, circumstantial evidence and the evidence as a whole. The witness' answers then tend to establish the opposite of what the witness wants the judge to think..

[47]     The burden of proof was on the Appellants. They were required to persuade me that the expenses incurred by the Appellant 91633 were not personal expenses that had been made for the benefit of the Appellant Hébert. They were also required to persuade me that the Appellant 91633 had incurred the expenses for the purpose of earning business income.

[48]     Assessing the credibility of the Appellant Hébert has played an important role in my decision, given the lack of documentary or objective evidence filed by the Appellants. Note that I have given little probative value to the testimony of the Appellant Hébert. During the examination, the Appellant Hébert simply made general statements that were not verifiable and, often, were unlikely. During cross-examination, conducted very methodically by counsel for the Respondent, the Appellant Hébert's explanations became evasive, vague, ambiguous, elusive, questionable, unintelligible, and difficult. The cross-examination of the Appellant Hébert with respect to the trip or the business trips to the Dominican Republic[17] and the use of the boat[18] and the Viper,[19] was very revealing in this respect. His hesitation, the time he took to answer, his demeanour, and his memory lapses only added to my doubts with respect to his credibility. On a number of occasions, he could have supported his statements with appropriate and serious documentary evidence and with independent and credible testimony. I inferred that this evidence would have been unfavourable to him. Moreover, the Appellant Hébert changed his version of the facts in his examination for discovery, the principal examination, and the cross-examination.[20] I noted much more than simple details in these conflicting versions; the Appellant Hébert's memory was very selective in the circumstances.

[49]     I had the clear impression that the Appellant Hébert was trying to conceal the truth throughout his testimony. For example, during the examination, the Appellant Hébert explained that some of his video games were unique and that they could cost up to $90,000 each. However, during cross-examination, I learned that the Appellant 91633 owned only one of these games during the years at issue. The Appellant Hébert explained that he returned the Viper to the warehouse after using it for business purposes. Further to the cross-examination, I learned that the warehouse in which the Appellant Hébert stored the Viper was the garage at his own personal residence.

Expenses relating to the recreational vehicles

[50]     It should be noted that the Appellant Hébert testified that the Appellant 91633 had acquired the recreational vehicles on which the "222" logo or the "Amusement 222" company name appeared for the purpose of arousing the curiosity of enthusiasts of these types of vehicles and to draw them to his game rooms. To do so, the Appellant Hébert explained that he had participated with these vehicles in a number of shows, exhibitions, or activities organized for these enthusiasts and that he had distributed pamphlets to them, after arousing their interest, to inform them of the nature of the Appellant 91633's activities and provide discount coupons to encourage them to visit the Appellant 91633's game rooms.

[51]     Once again, the Appellant 91633's evidence of its participation in various events relied on the sole testimony of the Appellant Hébert; he was satisfied with making general statements. The testimony of the Appellant Hébert was not supported by any documentary evidence whatsoever. I would have liked to examine these pamphlets and the contracts that bound the Appellant 91633 to the promoters of these events. In his testimony, he made no mention of the cost to the Appellant 91633 of the discount coupons handed out. Moreover, Mr. Lamarche testified that he went to the site of Mardis Cyclistes on two occasions, and he did not see the Appellant Hébert or his employees distributing pamphlets or discount coupons.

[52]     To demonstrate that the Viper had been used for business purposes, the Appellant Hébert testified that in exchange for the publicity, the Appellant 91633 had loaned out the Viper for use in the television series "Omertà" and to CKOI, a radio station, and that he had participated in Mardis Cyclistes de Lachine with the Viper. The Appellant Hébert's testimony in this respect merits citation:

[Translation]

Examination[21]

Q.         Did you receive payment for the use of the vehicle?

A.         No.    We did this in exchange for having our name appear somewhere in the film. We always did it in exchange for publicity.

Q.         I understand that you also have an agreement or some complicity with the radio station CKOI.

A.         The agreement I had with CKOI is that we would report to their site for them, wherever they needed us, in exchange for ...for air time. Rather than paying for 30 spots at $100 a spot, we traded for air time with CKOI. One full summer, another vehicle-a Prowler-was used; it was loaned out for the entire summer, for ten weeks, from June to August, it was loaned to CKOI for air time. I think it amounted to approximately $100,000 if I had to pay for it. I did it in '97 and in '98. We did it with the Viper too.

Q.         Can you tell the Court...I understand that the vehicle also participated in an activity known as "Les Rendez-vous cyclistes de Lachine."

A.         That happened in unusual circumstances. I went...one night, that I was passing through Lachine, and I happened upon Mardis Cyclistes. I got out of my car to watch the boat races, and the organizer, Mr. Rossi, approached me and told me that he would like that car to lead the cyclists, to be the pace car. He said that he was certain that it might attract even more people to his event. That's how it started. I asked him whether it was held on Tuesdays, and he answered that it was. He told me that there were still five or six Tuesdays left, and I started attending Mardis Cyclistes on the following Tuesday. After that, I participated in '94, '95, '96, '97, '98, and '99. I think the events were held until 2000 or 2001. I did not participate in 2002, because Mr. Rossi was no longer the organizer. That was in exchange for publicity. Mr. Rossi, for each lap we did of the...the course was over four streets and I was the pace car in front. Of course, I was 200, 300, or 400 feet ahead, depending. I drove the referee...the race official was with me in the vehicle. Each time we passed by, there were people in the streets, and Mr. Rossi would announce that the vehicle was sponsored by Amusement 222 in Lasalle, Châteauguay, Saint-Constant, and he always promoted the one nearby.

Cross-examination[22]

Q.         And you told us that it had been loaned out for the television series "Omertà."

A.         The '94, yes.

Q.         The '94, so the red one.

A.         Yes.

Q.         Is it true that you have not personally seen the television series "Omertà?"

A.         Listen, I may have seen the program...

Q.         Is it maybe, or yes, or no?

A.         I'd rather say no, because if it's ten minutes, if it's yes, it's yes, and if it's no, it's no. I may have turned it on once and watched Omertà for ten minutes, the time I took to sit down, and then I left.

Q.         Have you ever watched the program to check whether the vehicle could be seen?

A.         Myself, no.

Q.         You, no. Have you...Is it true that, in the program, the "222" identification cannot be seen on the vehicle?

A.         On television, no.

Q.         To your knowledge...

A.         No.

Q.         ... was that vehicle going to be in the program with the lettering affixed to it? Did Omertà want the person driving it to appear to be an owner of 222?

A.         No. The vehicle was loaned out at the beginning of Omertà, it was the summer of '94, I believe, that Omertà started. They used it in exchange for publicity for us. After the program...

Q.         The exchange for publicity was with whom?

A.         With Omertà .

Q.         Omertà or a television station?

A.         It was Omertà .

Q.         Omertà ?

A.         It was the producers of Omertà .

Q.         Who at Omertà , which producers? With whom did you make this exchange agreement?

A.         No idea, Madam, right now, I don't remember.

Q.         No idea?

A.         No. All I know is that, if they needed the car at five o'clock in the morning, one of my employees would drive the car over, because that was the time I went to bed. We must have gone over there five or six times to do things. The employee would arrive there at six o'clock in the morning, and he'd leave from there sometimes at noon, sometimes he came back at nine o'clock, sometimes he be back at two o'clock in the afternoon, because they had scenes to shoot, and the employee would have to wait.

[...]

Q.         Regarding the Mardis Cyclistes, we will look at it later in the hearing; your expert report showed that there was a value or a mention of the event on television. So, that means that, in the sports bulletins, the results of Mardis Cyclistes would be given and your vehicle, the '94 Viper would be seen. Is it true that you have not seen these sports bulletins?

A.        I saw, I saw it on some occasions, we could see the race, the end of the race, and I was turning. I always saw the back of [my car]. I can't say that that vehicle received any publicity.

Q.         In what year did you see that?

A.         Oh, goodness! I would say two or three times a summer in various events, and I have to rely on my clients. The clients I saw would say that they saw it on Mardis Cyclistes, that they just saw the back of the vehicle. That's what they would tell me.

Q.         So, they could see the back of the vehicle, but they couldn't see the "222" logo?

A.         I didn't ask them what they could see.

Q.         Well, if they were looking at the back...

A.         They told me they saw the 222 Viper.

Q.         You told me that they saw the back of the vehicle.

A.         Well, the back of the vehicle...

Q.         On the back of the vehicle, the 222 logo is visible, Sir. We saw it on the photograph.

A.         Madam, I can't speak for them. I don't know. They told me that they saw the 222 Viper, and I know that my 222 Viper at Mardis Cyclistes had lettering in the back, on the right and the left; I told you that earlier. I think that it also had the logo in the centre at the back also. I'm telling you what my clients reported to me. I can't speak for them.

[53]     Once again, during the examination, the Appellant Hébert simply made general statements most of the time. During cross-examination, the explanations provided by the Appellant Hébert were evasive and ambiguous. The time he needed to respond only added to my doubts as to his credibility. He could have supported his claims with serious documentary evidence and with independent and credible witness testimony. For example, he could have filed into evidence the contracts that bound the Appellant 91633 to the producers of the television series Omertà and to the radio station CKOI, excerpts from Omertà in which the Viper appeared, the name of the Appellant 91633 in the credits, and excerpts of the relevant sports news broadcasts on Mardis Cyclistes. I would have liked to hear the testimony of Mr. Rossi, the person responsible for Mardis Cyclistes. None of this was done. I inferred that this evidence would have been unfavourable for the Appellants.

[54]     Moreover, Mr. Lamarche, whose credibility is beyond doubt, stated that he attended the Mardis Cyclistes event twice in 1998 to see the Appellant 91633's vehicles. He testified that it was difficult, if not impossible, to see the Appellant 91633's company name or logo on these vehicles. He also added that he had not heard announcements during these races stating that the Viper had been provided by Amusement 222, contrary to the Appellant Hébert's statement. He stated that immediately after attending these races, he had viewed a number of sports news reports on a number of television stations, and he did not see the Viper[23] or hear any mention of the Appellant 91633 during these news programs. With respect to the television series Omertà, Mr. Lamarche testified that he had seen one episode of this series (in which the Viper appeared briefly), and he was able to confirm that the name of the Appellant 91633 did not appear at any time.

Absence of personal use

[55]     Counsel for the Appellants maintained that his clients had provided evidence that the Appellant Hébert had not driven the Appellant 91633's vehicles for personal use. It should be noted that this evidence relied solely on the testimony of the Appellant Hébert. The Appellant Hébert explained that the Appellant 91633's numerous recreational vehicles had low mileage and few hours of use. On one hand, I have not seen any objective physical evidence in support of these claims. I deduce that the physical evidence that the Appellant 91633 was able to produce would have been unfavourable to it. On the other hand, the physical evidence in support of this claim would have shown, at most, that the recreational vehicles had served their purpose very little, which says little about the nature of the Appellant 91633's use of them. The Appellant Hébert also stated that he owned recreational vehicles personally and that he did not need the Appellant 91633's vehicles for his and his family's personal use. This could also show that the Appellant 91633 had acquired all of these vehicles to satisfy the Appellant Hébert's desire to own this type of vehicle and keep company with like-minded people.

[56]     The Appellant Hébert's participation in the two poker runs with the Appellant 91633's leased boat on Lake Ontario and in Georgian Bay, his testimony whereby he met Mr. Rossi, the person responsible for Mardis Cyclistes, for the first time by chance while driving the Viper, and the extent of the repairs made to the company's vehicles which, according to the testimony of the Appellant Hébert, were not used very frequently because they were mostly placed on display during shows are all aspects that lead me to doubt the Appellant Hébert's claims that he never drove the Appellant 91633's recreational vehicles for personal use.

Effectiveness of advertising methods used by the Appellant 91633

[57]     Bear in mind that the Appellants maintained that their innovative advertising methods paid off and enabled the Appellant 91633 to set itself apart from the competition. They filed into evidence two expert reports and had Mr. Genest and Mr. Davignon testify as experts in support of their claims.

[58]     Note that I give very little probative value to these two reports and to the testimony of these two experts.

[59]     Firstly, the Genest report and Mr. Genest's testimony, whereby a relation of cause and effect existed between the Appellant 91633's advertising strategy and increased sales figures, failed to persuade me. The Appellant 91633's increased sales figures and profitability could have resulted from a number of other factors, such as increased capital expenditures, the well-informed purchase of new video games, the expansion of the game rooms, location of the game rooms, and sound management. In my opinion, a survey of the Appellant 91633's clients, conducted by a reputable firm, would have been the only way to establish the cause-and-effect relationship between increased patronage of the Appellant 91633's game rooms and the advertising strategy in this case.

[60]     Secondly, it is also my opinion that the Stratégem report and

Mr. Davignon's testimony had very little probative value in this case for the following reasons:

          (i)       Firstly, I have serious doubts as to the existence of the facts and information on which the Stratégem report established the cumulative advertising value of the recreational vehicles. I recall that Mr. Taschereau determined this value on the basis of the facts and information provided by the Appellant 91633, which he did not personally validate, that the Appellants did not provide any objective evidence in this respect, and that the credible testimony of Mr. Lamarche and Mr. Tashereau cast a serious doubt on the existence of the television spots (Mardis Cyclistes and Omertà) to which the majority of the advertising value was connected.

          (ii)       Secondly, I endorse the conclusion of Mr. Taschereau, the Respondent's expert, whereby posting the company name or a logo could not in itself constitute a message that is likely to increase the sales figures of a company, except in exceptional circumstances (for example, Nike).

[61]     The Appellants absolutely did not persuade me that the advertising strategy paid off. In fact, I feel that the purpose of the Appellant 91633's alleged advertising strategy was to conceal the personal expenses incurred by the Appellant Hébert and paid by the Appellant 91633. Why would the Appellant 91633 assume solely the very high cost of this advertising strategy which, according to the Appellants, had produced positive benefits for all of the game rooms, including those in Saint-Constant, Longueuil and Ville Lasalle, which were held in equal parts by the Appellants and third parties? Why were these costs not assumed in part by the third parties? It is my opinion that this fact supports the Respondent's theory that the third parties did not want to pay for the Appellant 91633's toys.

[62]     Based on the evidence filed, I conclude that the Appellant 91633 did not make or incur these expenses for the purpose-even the secondary purpose-of earning business income. It is my opinion that the Appellant 91633 made or incurred these expenses for the purpose of allowing the Appellant Hébert to practice his hobby at the expense of the Appellant 91633: the Appellant Hébert was adventurous, in the words of his counsel, and he loved to simply own this type of vehicle and to attend these events to spend time with like-minded people. There is nothing wrong with harbouring this passion; however, the Appellant Hébert would have had to satisfy his passion through his own financial means, not through those of the Appellant 91633. It should be noted that where property is acquired to satisfy a personal desire, it may reasonably be considered to have been acquired for personal purposes, even though the property was not used or used very infrequently for personal purposes. The fact that the Appellant 91633's logo or company name, seen on its recreational vehicles, had a positive effect (albeit very minimal, in my view) on patronage at the game rooms does not show that the Appellant 91633 did so for business purposes. In my opinion, a difference must be made between a business effect and a business purpose. It is my opinion that the purpose of affixing the Appellant 91633's logo or company name on the vehicles was to conceal the Appellant Hébert's personal expenses. In my view, the Minister was correct to disallow all of the Appellant 91633's expenses relating to these recreational vehicles and to assess the Appellant Hébert for the tax owing on these amounts, because the expenses were personal expenses of the Appellant Hébert, paid by the Appellant 91633. In light of my decision, I find no need to rule on the reasonable nature of these expenses.

Trip(s) to the Dominican Republic

[63]     Were travel expenses totalling $11,337, incurred by the Appellant 91633 for one or two trips taken by the Appellant Hébert to the Dominican Republic deductible in the computation of the Appellant 91633's business income for the 1995 taxation year?

Supporting documents

[64]     Page J-22 of Exhibit I-4 (Visa statement) showed that the Appellant Hébert made the following expenses:

                   Amount                        Supplier                                        Date

(i)                    $389.00               Air Canada Vacations            November 11, 1994

(ii)                   $580.20               Edmond Elias-Hamaca          November 25, 1994

(iii)               $1,160.38               Edmond Elias-Hamaca          November 26, 1994

The following handwritten note appeared on this document: [Translation] "Trip to Dominican Republic to Michel Hébert's condo."

[65]     Page J-23 of Exhibit I-4 (Visa statement) showed, at most, that the Appellant Hébert had paid his Visa bill in the amount of $7,674.70 on March 31, 1995.

[66]     Finally, page J-24 of Exhibit I-4 is an American Express statement addressed to Mr. Jean-Marie Robert, the Appellant 91633's bank manager. This statement showed that Mr. Robert purchased two airplane tickets (round-trip from New York to Santo Domingo) on April 3, 1995. The Appellant Hébert and

Mr. Robert were listed as passengers on the statement. The total cost of the transaction was $1,532.58.

[67]     The explanations provided by the Appellant Hébert during examination by his counsel and during cross-examination by counsel for the Respondent with regard to the documentary evidence and the purpose of these trips merit citation:

[Translation]

Mr^. Serge Fournier:[24]

Q.         Can you tell the Court why you travelled to the Dominican Republic?

A.         I went to the Dominican Republic to investigate the market that existed there....

Judge:

Q.         Alone or with someone else?

A.         With my bank manager.

Q.         The manager of what?

A.         The bank. The $11,337 for the trip, I don't think that that was for just one trip. I think it covers two trips...because I have never spent $11,000 on one trip. Because we used to have what's known today as poker machines-they belong to the government today, but we used to own them prior to '93. And the infamous battle we had, where they were telling us that we were...They were legal, but we were illegal...the infamous illegal machines. The government gave us a set timeframe to remove them. We had quite a few of them in the company; I believe we had forty or fifty of them. So we went to check it out in the Dominican Republic, and I already...I went there every year. I've been going there since 1978 or 1980...I go to the Dominican Republic for a one-week vacation every year. I had met people in the entertainment business there. It was a man from New York, and he told me that he may want to sell. So we went to New York to investigate the possibility of...

Q.         He wanted...excuse me.

A.         Because the man...

Mr. Serge Fournier: One moment, Mr. Hébert.

Judge:

Q.         The man from New York, you met him in the Dominican Republic?

A.         Yes. I had met him in the Dominican Republic.

Q.         Okay, and what did he want to sell?

A.         He has machines in the Dominican Republic. He had installed video games here and there.

Q.         Alright.

A.         So, from there, we took the opportunity to meet with him. I knew that there were a lot of Canadians in some villages like Puerto Plata, Sosua, Cabarete in the north, and I also knew that there were some in the south. And I thought that this might be an opportunity to take my machines there and start working there. In the end, it was too complicated to bring our machines there with Customs and everything...at any rate, I think that we decided that it was too much of a hassle to clear Customs, that it was a waste of time. So we dropped the project. And the machines, a lot of them were broken and we still have some.

Ms. Nathalie Lessard:[25]

Q.         Let's talk about your trip to the Dominican Republic. I'm trying to find one of the supporting documents. Please turn to page J-22, in I-7, the package...

A.         That's it.

Q.         ...with a paperclip, J-22.

Judge: I-7?

Ms. Nathalie Lessard: In...oh, I'm sorry, it's I-4, J-22.

Q.         Among your expenses in the Dominican Republic, you paid $389 for airfare through Air Canada Vacations. Correct?

A.         Yes.

Q.         On your Visa Statement, a transaction with Edmond Elias Hamaca in Boca Chica, $580.

A.         Yes. That's the Hamaca hotel.

Q.         Alright. There were notations stating "at Michel Hébert's condo," but you told me that you do not have a condo in the Dominican Republic.

A.         That's what I told you or the condo.

Q.         And you say that you do not have one.

A.         That's right. That was at the hotel.

Q.         So, you're saying that your claims are for hotels?

A.         Yes, that's the hotel. The hotel.

Q.         Airfare for one or two? $389 must have been airfare for one that time?

A.         I don't know.

Q.         That was a statement dated December 12, 1994, for an expense dated November 11, 1994, I presume, given that the statement is for 1994. From memory, could $389 in '94 be for airfare for more than one person?

A.         It might have been one or it could have been two...I've been to the Dominican Republic for $129 return, and I've been for $339 return. Right now it's $999 return. I don't know, Madam. I see one, there.

Q.         Now, please go to page J-23, another Visa statement, this one from '95. This one is dated December 4, 1995, and a charge for $7,674 appears; this is part of your claim for the trip to the Dominican Republic. Do you know what this amount covers? Hotels, airfare, restaurants?

A.         I would have to ask for a statement. I imagine that it was for hotels. It doesn't say anything. It says "Thank you payment" and that's all. There's no...

Q.         From memory, don't you remember any of the details?

A.         Oh no, from memory, no. If that was paid, there must have been a car rental, or hotel, or restaurants. It must have been for the entire week, including airfare. It doesn't specify.

Q.         Alright. Now, J-24 is a statement addressed to Mr. Jean-Marie Robert, April 20, 1995, American Airlines, for a ticket for Mr. Jean-Marie Robert.

A.         To return.

Q.         That's for...that's a return ticket only?

A.         I believe that it was for a return ticket only. Our passports were stolen.

Q.         When was the one-way ticket paid? By whom?

A.         What?

Q.         How was the one-way ticket paid?

A.         If that's a repayment to Jean-Marie Robert, it's because he used his credit card, because mine must have been overdrawn. We were gone for one week, and we were robbed at the hotel; our passports were stolen. We had to go to the Canadian embassy and we had to stay for an extra two or three days. When you travel on a chartered flight like that, and you don't take the plane seven days later, you lose your tickets. We had...he's the manager of the bank here; we didn't have to stay for a full extra week. I think that it took three days and we received our passports so that we could return. We had to fly American Airlines for the return trip, and this was to repay him. I don't think that my manager should have to pay for that.

Q.         You told us that this expense that you claimed was because you tried to open a...

A.         I don't know if it was that time, but...at any rate, both of our passports were stolen. I'm guessing that it was that time.

Q.         These are the documents that were provided to support what you told us in your testimony in chief, a business trip to the Dominican.

A.         Yes.

[68]     Firstly, the Appellant Hébert testified with uncertainty that he thought he had taken two trips to the Dominican Republicrather than one, given the amounts at issue. His response with respect to owning a condominium in this country was ambiguous. His explanations for the expenses worth $7,674.70 were evasive and difficult. Was the sum of $389 paid to Air Canada Vacations for airfare for one or two people? Did Mr. Robert travel with the Appellant Hébert on the first trip? The answers to these two questions were, again, ambiguous, evasive, and elusive.

[69]     According to the supporting documents, the first trip cost $9,805 and the second cost $1,532. How can the lower cost of the second trip be explained if

Mr. Robert travelled with the Appellant Hébert? Who paid for the airfare (from Montréal to Santo Domingo) and accommodations for the second trip? This remains unexplained and unexplainable.

[70]     The Appellant Hébert's explanations for the purpose of this or these trip(s) were also vague, ambiguous and evasive. Further to a careful examination of his testimony in this respect, I was unable to determine with certainty whether the Appellant 91633 wanted to liquidate its video poker machines in the Dominican Republic, whether it wanted to acquire one or more game rooms there, or whether it wanted to start one up. The Appellant Hébert did not even name the businesses or the people with whom he had met there. Moreover, no documentary evidence that could have supported his testimony with respect to the work he did there was filed.

[71]     To summarize, the Appellant Hébert simply made general statements that were not verifiable and on a number of occasions, unlikely, with respect to the trip expenses. Most of the explanations he gave in this respect were ambiguous, elusive, questionable, unintelligible, and difficult. He could have supported his statements with appropriate and serious supporting documents and by independent and credible testimony, namely, Mr. Robert's. He did not do so. I infer that this evidence would likely have been unfavourable to him.

Expenses relating to the three vehicles

[72]     I will recall that during the years at issue, the Appellant 91633 had made three vehicles available to the Appellant Hébert (the Jeep, the Mercedes, and the Viper). The Minister acknowledged that it was reasonable for the Appellant 91633 to make a vehicle available to it's president for his frequent business trips. However, the Minister determined that it was unreasonable for the Appellant 91633 to provide its president with three vehicles. The Appellants maintained that the three vehicles were used solely by the president for business purposes. The Minister determined that the percentage of use for business purposes for each of these vehicles was 33 percent. The question that arises is the following: Would a reasonable company provide its president with three vehicles in the same circumstances with no more than the business interests of the company at heart? I believe that it would not, and I consider that the Minister's position in this matter was exceedingly generous.

Other expenses

[73]     It is my opinion that the Minister was entitled to disallow all the Appellant 91633's other expenses [Translation] "aside from those included in my analysis" and to assess the Appellant Hébert for the same amounts. I note that the burden to show that, on the balance of probabilities, the Minister was wrong on these points was on the Appellants. The Appellants simply did not provide any explanation in that regard.

Penalties

[74]     I recall that the imposition of the penalty provided for at subsection 163(2) of the Act is disputed only with respect to the sum of $13,500 appropriated by the Appellant Hébert and added to the income of the Appellants for the 1995 taxation year and with respect to the expenses of $11,337 for the trip to the Dominican Republic.

[75]     Firstly, given my finding that the expenses for the trip to the Dominican Republicwere personal in nature, it is my opinion that the Minister was entitled to impose this penalty.

[76]     Secondly, with respect to the penalty on the sum of $13,500, it should be noted that the Appellant Hébert admitted that he appropriated $13,500. This appropriation of funds, added to the income of the Appellant Hébert for the 1995 taxation year, represented sales that were unreported by the Appellant 91633 and credited to the "owing to shareholder" account, rather than being included as business income. The evidence showed that this was the only time a sum of cash had been credited to the "owing to shareholder" account during the taxation years at issue. The Appellant Hébert provided no explanation as to why and how he appropriated these funds. He claimed that an administrative error had occurred. His testimony during examination by his counsel on this topic and during cross-examination by counsel for the Respondent merits citation:

[Translation]

Mr. Serge Fournier[26]

Q.         In 1995, Mr. Hébert, the sum of $13,500 was deducted from your advances, yet this was business income. Can you tell the Court what you know about this?

A.         I can't explain it. Ever since they told me about it in '97 or '98, I've been trying to find the solution, the error that happened. I can't find it. Like I said, I'm nearly always on the road; I come in to the office for an hour or two a day, and sometimes I can go two or three days without being there. I can't find the error if it was made by my office, if it was made by accounting; I can't find it. I've thought about it, and I thought that at one point it was a company truck that was sold and entered, but I can see that it was in '95 and the truck was sold in '92. So that wasn't it. I really can't see what happened in '95, things were moving too quickly. It took up too much of my time.

Ms. Nathalie Lessard[27]

Q.         You told us in your testimony in chief that when the people in your office are unsure, they ask [Translation] "What do you want to run through the company?"

A.         They ask.

Q.         [Translation] "What do you want to run through as personal?"

A.         Yes.

Q.         They ask you?

A.         Yes.

Q.         Alright.

A.         They ask when they aren't sure themselves.

It should also be noted that no employee working in the accounting section for the Appellant 91633 testified in this respect.

[77]     It is my opinion that the Minister has discharged his obligation to show that it was more likely that this was not simply an administrative error in this case. On the contrary, in my opinion, the Minister showed that, on the balance of probabilities, the Appellant Hébert was wilfully blind and grossly negligent in this case. An employee of the Appellant 91633 made an administrative error that was not noticed by the Appellant 91633: the explanation seems to me to be too easy, given the amount at issue and the unique nature of the transaction. Moreover, the extent of the personal expenses relating to the Appellant 91633's recreational vehicles and the Appellant 91633's disallowed expenses that the Appellant Hébert acknowledged as personal expenses also led me to conclude that it was most likely that the Appellant Hébert had committed gross negligence as a result of his wilful blindness.

Prescription

[78]     Did the Minister correctly reassess the Appellant 91633 for the taxation years ended October 31, 1992, and October 31, 1993, and the Appellant Hébert for the 1992 and 1993 taxation years, in accordance with subparagraph 152(4)(a)(i) of the Act? Counsel for the Appellants acknowledged that, should I find that the expenses relating to the use of the recreational vehicles were personal in nature, the penalty should be applicable. Because I previously concluded that these were personal expenses, these reassessments were justified.

[79]     For these reasons, the appeals are dismissed, with costs. However, the Respondent is entitled to one set of costs only.

Signed at Quebec City, Quebec, this 13^th day of December 2004.

"Paul Bédard"

Bédard J.

Translation certified true

on this 18^th day of July 2005.

Colette Dupuis-Beaulne, Translator

APPENDIX "A"

	1992	1993	1994	1995	1996
Additional unreported sales				$13,500
Disallowed equipment maintenance expenses			$673	$1,202	$21,644
Disallowed purchases			$2,417	$18,314
Disallowed maintenance expenses - premises			$143	$1,334
Disallowed telephone and electricity expenses			$9,864	$8,380	$7,431
Disallowed exhibit and rental expenses	$36,280	$40,053	$37,560	$48,461	$26,212
Disallowed advertising expenses			$3,595	$1,054	$2,967
Disallowed travel expenses				$11,337
Disallowed traveling expenses		$8,520	$34,824	$10,625	$1,035
Disallowed office expenses			$2,137	$257
Disallowed vehicle depreciation expenses		$3,746	$11,362	$15,198	$20,032
Disallowed insurance and alarm expenses		$424	$4,790	$2,994	$2,181
Disallowed interest expenses			$1,677	$3,100	$4,434
Disallowed entertainment expenses			$171
Disallowed tax claims				$5,440	$75
Total adjustments	$36,280	$52,743	$109,213	$146,196	$86,011
Penalties applied pursuant to subsection 163(2) of the ITA	$2,329	$3,386	$12,943	$15,685	$12,523

APPENDIX "B"

	1992	1993	1994	1995	1996
Appropriation of funds				$13,500
Personal expenses paid by 91633
Maintenance and repairs - equipment				$1,644	$20,000
Maintenance expenses-premises				$507
Telephone and electricity		$766	$8,283	$7,884	$6,531
Exhibits and rental of automotive equipment	$36,280	$40,053	$37,560	$48,459	$26,212
Advertising		$2,529	$1,965		$2,967
Disallowed labour expenses				$5,440
Travel expenses			$2,130	$9,207
Traveling expenses		$8,555	$34,778		$1,035
Office expenses		$1,984	$12
Depreciation of vehicles		$3,746	$11,362	$15,198	$20,032
Insurance and alarm expenses		$424	$4,790	$2,593	$2,181
Interest on financing			$1,677	$3,100	$4,433
Entertainment expenses			$171
Taxes					$75
Total adjustments	$36,280	$58,057	$102,728	$107,532	$83,466
Penalties applied	$4,892	$7,703	$13,629	$14,267	$11,075

CITATION:

2004TCC760

COURT FILE Nos.:

2001-2721(IT)G, 2001-2720(IT)G

STYLE OF CAUSE:

Michel Hébert and Her Majesty the Queen and 91633 Canada Ltée and Her Majesty the Queen

PLACE OF HEARING:

Montreal, Quebec

DATE OF HEARING:

May 12, 2004

REASONS FOR JUDGMENT BY:

The Honourable Judge Paul Bédard

DATE OF JUDGMENT:

December 13, 2004

APPEARANCES:
	For the Appellants:	Serge Fournier

For the Respondent:

Nathalie Lessard

COUNSEL OF RECORD:

For the Appellants:
	Name:	Serge Fournier

Firm:

Brouillette Charpentier Fortin Montreal, Quebec

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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