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Docket: 2001-3648(IT)I |
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BETWEEN: |
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GAÉTAN GAGNON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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[OFFICIAL ENGLISH TRANSLATION] |
Appeals heard on April 9th, 2003, at Rivière-du-Loup, Quebec
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Before: The Honourable Justice Alain Tardif |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Stéphanie Côté |
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed in that the assessments corrected or amended as a result of the partial consent to judgment filed when the hearing was reopened are confirmed, and the penalties applicable to the corrected assessments are also confirmed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 14th day of November 2003.
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"Alain Tardif" |
Tardif, J.
Translation certified true
on this 31st day of August 2004.
Sophie Debbané, Revisor
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Citation: 2003TCC340 |
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Date: 20031114 |
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Docket: 2001-3648(IT)I |
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BETWEEN: |
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GAÉTAN GAGNON, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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[OFFICIAL ENGLISH TRANSLATION] |
REASONS FOR JUDGMENT
Tardif, J.
[1] These are appeals from assessments for the 1996 and 1997 taxation years.
[2] After taking the matter under advisement, the Court ordered that the hearing be reopened on June 26, 2003, as a result of an application by the appellant dated May 7, 2003. A partial consent to judgment was reached on September 22, 2003. Its content should be reproduced here:
[TRANSLATION]
...
The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are allowed, without costs, and the whole is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the terms of the consent to judgment appended hereto, which forms an integral part of this judgment:
1. an amount of $13,181 shall be subtracted from the appellant's assets in the computation of net worth under the item "Debtors";
2. the amount added to the appellant's income for the 1997 taxation year becomes $23,015, and the amount subject to the penalty is therefore $29,748 (the difference results from adjustments to depreciation allowed);
3. accordingly, subparagraph 13(i) of the Reply to the Notice ("Reply") should be amended to replace the amount of $42,929 with the amount of $29,748;
4. similarly, paragraphs 14(a) and 16 of the Reply should be amended to replace the amount of $36,196 with the amount of $23,015.
As to the validity of the assessments issued by the Minister of National Revenue and the penalties assessed, apart from the amendments agreed upon, the parties leave the entire matter to the judgment of the Court and rely on the evidence and arguments at the hearing of April 9, 2003.
Signatories: Frank Lemieux
Rivière-du-Loup, September 22, 2003
Stéphanie Côté
Montréal, September 2, 2003
[3] As a result of the consent to judgment, the points for determination are:
(a) whether in computing the appellant's income for the 1996 and 1997 taxation years, the respective amounts of $17,694 and $23,015 were correctly added as unreported business income;
(b) whether the assessment against the appellant of the penalty provided for in subsection 163(2) of the Income Tax Act (the "Act") for the 1996 and 1997 taxation years was justified.
[4] In making and confirming the assessment at the objections level, the respondent made the following assumptions of fact (partially amended by the consent to judgment quoted above):
[TRANSLATION]
(a) The appellant operated an excavation and snow removal business during the years in issue;
(b) When filing his income tax returns, the appellant reported a net business loss of $9,542 for the 1996 taxation year and a net business profit of $10,144 for the 1997 taxation year;
(c) The appellant's income tax returns for the 1996 and 1997 taxation years were audited by the Minister of National Revenue;
(d) The Minister of National Revenue used the net worth method to make the reassessments for the appellant's 1996 and 1997 taxation years;
(e) The summary of adjustments and determination of additional income are attached to this reply as Schedule A to form an integral part hereof;
(f) The value of each of the assets and liabilities was determined on the basis of documents or information provided by the appellant, confirmations obtained from financial institutions or documents obtained from third parties;
(g) During the years in issue, the appellant supported his spouse and three children;
(h) The personal expenses of the appellant and his family were determined on the basis of the amounts presented by the appellant, duplicates of cheques issued by the appellant and documents obtained by third parties;
(i) In failing to report the amounts of $16,649 and $29,748 respectively, the appellant knowingly, or under circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of, a false statement or omission in his tax returns filed for the 1996 and 1997 taxation years, as a result of which the tax he would have been required to pay based on the information provided in those years was less than the amount of tax payable for each of those years.
(Emphasis added.)
[5] The appellant and his accountant, Ghislain Bélanger, testified in support of the appeal. The respondent produced the auditor in the case, Jean-François Paradis.
[6] The appellant submitted that his cost of living and that of his family had been overvalued by approximately $10,000 for each of the taxation years.
[7] The cost of living was determined on the basis of a meeting at the appellant's residence in his spouse's presence. Frank and civilized discussions took place, and the various components were addressed and determined on the basis of information from the appellant, his spouse and certain documents, including cheques.
[8] At the objection stage, the appellant's accountant intervened and discussions and negotiations took place. With the exception of the clothing item, both for the appellant and for the members of his family, in which the accountant expressed certain reservations, the amounts allocated to the various items were considered acceptable, particularly since the appellant and his spouse were called upon to a considerable degree to provide details of their content.
[9] Following those discussions and negotiations, the respondent apparently then decided to drop its plan to assess for 1995.
[10] At the hearing, the appellant stated that he had once again reviewed the amounts allocated to the various components assumed in evaluating his cost of living and that of his family, of which he was the sole financial support. Following his review in the months that preceded the hearing, he presented a detailed statement of what he and his family had purportedly paid for their own sustenance for the years in issue.
[11] I explained to the appellant that the burden of proof was on him with respect to the principal of the assessment and, conversely, that the burden was on the respondent with respect to the penalties.
[12] The appellant and his accountant disputed certain bases of the assessment, relying on explanations that could raise some doubts. The appellant stated that he had not spent the amount shown under the food item because he and his family lived on a small farm and grew what the family needed. He also kept chickens and occasionally pigs and a bullock.
[13] He also stated that the amounts paid for clothing were instead $200 a year for him, $250 for his spouse and $800 for the two teenage students.
[14] Under the hairdresser-barber item, the appellant reduced the amount from $540 to $140 on the ground that his elder daughter did the hairstyling of his spouse, his younger daughter and himself.
[15] Lastly, the final item for which the appellant submitted a significant variation was the hunting-fishing component; the respondent had estimated $1,000, and the appellant contended that he spent a maximum of $200 for that item.
[16] The appellant's explanations were neither supported nor confirmed by outside factors, and the objections were essentially based on arbitrary valuations. At the time of the assessment, the valuations had been made on the basis of open discussions during which the appellant's spouse was present; she moreover had been involved in the discussions.
[17] The assessment was made using the net worth method since the appellant's accounting was deficient and very unreliable given that there was no internal control. Therefore, there was no numerical sequence in the billing used, the main basis for computing his income. Furthermore, a significant portion of the income generated by the appellant's activities was paid to him in cash.
[18] At this point, I think it appropriate to recall a passage from the judgment of the Honourable Associate Chief Justice Bowman of this Court in Ramey v. Canada, [1993] T.C.J. No. 142, who wrote as follows:
... The net worth method of estimating income is an unsatisfactory and imprecise way of determining a taxpayer's income for the year. It is a blunt instrument of which the Minister must avail himself as a last resort. A net worth assessment involves a comparison of a taxpayer's net worth, i.e. the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary. Such assessments may be inaccurate within a range of indeterminate magnitude but unless they are shown to be wrong they stand. It is almost impossible to challenge such assessments piecemeal. The only truly effective way of disputing them is by means of a complete reconstruction of a taxpayer's income for a year. A taxpayer whose business records and method of reporting income are in such a state of disarray that a net worth assessment is required is frequently the author of his or her own misfortunes.
[19] Unreservedly subscribing to this statement by Associate Chief Justice Bowman, I conclude that the evidence adduced by the appellant does not meet the minimum requirements for characterizing it as preponderant. Discharging a burden of proof requires that the appellant demonstrate that the facts assumed by the respondent are false. It is not enough to raise doubts as to their relevance through essentially oral explanations.
[20] To succeed, the appellant would have had to establish on a balance of evidence that the facts assumed were false and that his own claims were plausible and reasonable. To do so, he could and should have involved every person who might be able to substantiate his statements, particularly since the audit work was irreproachably done.
[21] The size of the amount in question cannot be explained or justified on the basis of trivial or insignificant errors.
[22] The appellant and his accountant admitted that some income had not been reported, but their claims concerned only a portion of the unreported income.
[23] In view of the size of the unreported amount in relation to the amounts that were reported, there can be no doubt that, in carrying out his obligation imposed by the Act, the appellant knowingly, or in circumstances amounting to gross negligence, made a false statement that justified the penalty assessed.
[24] The size of the unreported amounts cannot be explained or justified as the result of a mere error or trivial oversight. The accounting was based on a system of invoices that were not numbered sequentially and thereby certainly gave rise to ambiguity.
[25] For these reasons, the appeals are dismissed in that the assessments corrected or amended as a result of the partial consent to judgment filed when the hearing was reopened are confirmed, and the penalties applicable to the corrected assessments are confirmed as well.
Signed at Ottawa, Canada, this 14th day of November 2003.
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"Alain Tardif" |
Tardif, J.
Translation certified true
on this 31st day of August 2004.
Sophie Debbané, Revisor