Immeubles Équation Inc. c. La Reine

Immeubles Équation Inc. c. La Reine Court (s) Database Tax Court of Canada Judgments Date 2003-12-30 Neutral citation 2003 TCC 943 File numbers 2002-3503(IT)I Judges and Taxing Officers Louise Lamarre Proulx Subjects Income Tax Act Decision Content Citation: 2003CCI943 Date: 20031230 Docket: 2002-3503(IT)I BETWEEN: IMMEUBLES ÉQUATION INC., Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT (Delivered orally from the bench on October 23, 2003, at Montréal, Quebec and edited at Ottawa, Canadaon December 30, 2003) Lamarre Proulx, J. [1] These are appeals under the informal procedure for the 1998, 1999 and 2000 taxation years. [2] Jean-Guy Labonté, president and sole shareholder of the Appellant, represented the Appellant. [3] The Notice of Appeal states the following: [translation] The relevant facts are as follows: the disallowed business expenses for 1998, 1999 and 2000 were added to the personal income of the undersigned. [4] Paragraph 4 of the Reply to the Notice of Appeal (the "Reply") reads as follows: [translation] (a) During the taxation years at issue, the fiscal year for each of the said years of the Appellant ended on August 31; (b) During the taxation years at issue, the principal business activity of the Appellant, the company "Immeubles Équation inc.," was real estate; (c) Jean-Guy Labonté was the sole shareholder of the company "Immeubles Équation inc." during the taxation years at issue; (d) Jean-Guy Labonté was the sole employee, a real estate agent, of the company "Immeubles Équation inc." during the taxation years at issue; (e) The Minister noted gaps, in terms of the internal control of the company, with regard to the taxation years at issue; (f) In order to verify the income reported by the Appellant, the company "Immeubles Équation inc.," for the years at issue, the Minister reconciled the deposits made into the company's bank account with the signed contracts; (g) In addition, since there was no supporting documentation to justify the expenses claimed, except in relation to the fiscal year ending on August 31, 2000, the Minister reviewed with Mr. Labonté the merits of each expense claimed, on the basis of the year 2000; (h) As a result of this audit, the Minister adjusted the Appellant's income tax returns for the 1998, 1999 and 2000 taxation years as follows: 1998 1999 2000 (i) Unreported income (1) $18,695 $ $1,099 (ii) Disallowed expenses: (a) Advertising $4,532 $5,130 $3,014 (b) Insurance and licenses $2,751 $1,197 $ (c) Rent $2,243 $2,197 $2,021 (d) Maintenance and repairs $1,248 $1,039 $1,087 (e) Stationery, office expenses $3,156 $4,964 $3,740 (f) CCA - rolling stock $2,958 $2,071 $1,450 (2) $16,888 $16,598 $11,312 (iii) Total adjustment (1) + (2) $35,583 $16,598 $12,411 (i) With regard to the unreported income for the 1998 taxation year, the Minister determined the discrepancy using the following calculation, given that the income was reported on a cash basis: Fiscal year ending on August 31 1997 1998 (i) Contracts signed and deposited into the company account $36,113 $60,863 (ii) Plus: deposits in the company account for Sept. to Nov. 1997 $27,193 $63,306 (iii) Minus: reported sales $53,491 $51,983 (iv) Unreported income $18,695 $9,815 $8,880 (j) Under the heading "Advertising," the Minister allowed 50% of the expense claimed for each taxation year at issue; (k) Under the heading "Insurance and licenses," the Minister allowed $2,500 for the 1998 and 1999 taxation years, based on an analysis of the invoices for the 2000 taxation year ($2,463); (l) Under the headings "Rent" and "Maintenance and repairs," the Minister allowed 10% of the expenses claimed based on an estimate of the space used in the residence for business purposes; (m) Under the heading "Stationery and office expenses," the Minister allowed $1,500 for each of the years at issue, based on an audit of the invoices for the 2000 taxation year; (n) The Minister disallowed any claim for depreciation of the rolling stock, for each of the years at issue, as the Appellant uses a leased vehicle; (o) Only the amounts deemed to be unreported income were subject to the federal penalty, pursuant to subsection 163(2) of the "Act"; (p) In failing to report all of its income for the 1998 and 2000 taxation years, the Appellant knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in the income tax returns filed for the 1998 and 2000 taxation years, or participated in, assented to or acquiesced in the making of this false statement or omission, as a result of which the tax that it would have been required to pay based on the information provided in the income tax returns filed for those years was less than the amount of tax actually payable for those years. [5] Mr. Labonté explained the circumstances that led to the new assessments. During an audit of the Appellant, auditors from Canada Customs and Revenue Agency ("CCRA") noticed that there were interest-free shareholder loans. In addition, some of the Appellant's expenses were disallowed due to a lack of invoices. CCRA added this interest as well as the amount of the disallowed expenses to the shareholder's income. The shareholder paid these new assessments. [6] The Agent for the Appellant admitted paragraphs 4(a) to 4(d), 4(f) and 4(g) of the Reply. With regard to the sum of $18,695, indicated in paragraph 4(i) of the Reply, he submits that the amount for 1998 should be $8,880, to be consistent with the amount indicated in paragraph 4 (i)(iv) of the Reply. [7] With regard to paragraph 4(e) of the Reply, the Agent stated that some invoices were missing, and as such, there may have been some gaps. [8] With regard to paragraph 4(h) of the Reply, the Agent reiterated that the amount of unreported income for 1998 should be $8,880 and not $18,695. [9] On cross-examination, Mr. Labonté acknowledged signing an agreement proposed by the auditor, dated August 22, 2001, and filed as Exhibit I-1. This agreement describes the adjustments reported in paragraph 4(h) of the Reply. [10] With regard to this acceptance, Mr. Labonté submitted an excerpt from the appeals officer's report as Exhibit A-1. He emphasized the following passage from this report: [translation] ... it is true that this agreement has no legal authority and does not replace a waiver of the right of objection and appeal. ... [11] Counsel for the Respondent asked Mr. Labonté to acknowledge the Appellant's financial statements for the three years at issue. They were filed as Exhibit I-2. These statements were filed to show the substantial amount of expenses that were allowed, as this amount did not appear in the Reply. [12] At that time, Mr. Labonté claimed that whatever he signed in relation to expenses was appropriate and he did not intend to contest it. [13] Therefore, the Court asked him to identify the subject-matter of the dispute. He claims there is an error in the amount of unreported income for 1998. In particular, however, there is the fact that he feels he has been taxed twice on the same amount. The corporation does not permit the deduction of certain expenses; furthermore, this amount was added to his own income. [14] Counsel for the Respondent indicated to the Court that pursuant to subsection 15(1) of the Income Tax Act (the "Act"), Mr. Labonté, as a shareholder, was assessed on half of the adjustments, that the shareholder assessment is not at issue in this appeal and that this matter has been settled. [15] Mr. Labonté has carried on his business since 1982. He admitted that there was no income record, no expense record, no supporting documentation for 1998 and 1999, and that there was some such documentation for 2000. He explained that he had a record of real estate transactions indicating the names of both parties, the name of the notary, the total commission and the date of the notarized contract. This record, referred to as the record of transactions, is a record that must be kept pursuant to the rules that apply to real estate brokers. [16] Crown counsel submitted a letter, Exhibit I-3, that was sent to Mr. Labonté, dated October 4, 2001, concerning the keeping records and books. [17] Ms. Francine Duplessis is an auditor with CCRA. Her audit report was filed as Exhibit I-4. Due to the fact that the company had no accounting records or supporting documentation for 1998 and 1999, the auditor explained that she had to use bank statements and the record of transactions. [18] Since the company kept its invoices for the year 2000, the auditor used them to estimate the expenses that the company may have been entitled to in 1998 and 1999. [19] With regard to the $18,695, which was added to the unreported income for 1998, the auditor explained that during her audit of the 1998 taxation year, as described in paragraph 4(i) of the Reply, in addition to the sum of $60,863 relating to the contracts signed and deposited into the company account, there were other deposits totalling $27,193 for the months of September to November 1997. Therefore, these latter amounts should have been included in the 1998 taxation year, as the taxation year ended on August 31. [20] The auditor stated that Mr. Labonté had told her that this money had already been included in computing the income for 1997. Therefore, she audited the 1997 taxation year. By including the sum of $27,193 that the Appellant claimed to have received in 1997, there was still unreported income totalling $9,815. Rather than including $27,193 for 1998, the Appellant included $9,815. This amount, when added to $8,880, equals $18,695. [21] The auditor explained that she allowed the substantial expense amounts. For 1998 to 2000, the Appellant claimed deductions of $53,645, $61,834 and $65,068 respectively; the auditor allowed $36,757, $45,236 and $53,756 respectively. [22] Allen Tremblay, appeals officer, testified. His report was filed as Exhibit I-5. He maintained the assessment of penalties on the unreported income because the Appellant had been negligent in its bookkeeping. [23] In response to a question posed by the Agent for the Appellant, who had personally been assessed under subsection 15(1) of the Act, the witness explained that this provision is indeed a penalizing provision. Its purpose is to prevent the appropriation of company property by a shareholder. The amount appropriated by a shareholder is not granted as a salary expense in the company, however it can be assessed in the hands of the shareholder. The lawful means by which to withdraw money from a company include paying salaries and issuing dividends. Arguments [24] The Agent for the Appellant reiterated the complaints described earlier, in paragraph 12 of these reasons; that is, unreported income in the amount of $18,695 instead of $8,880 and, in particular, the issue of double taxation. [25] Counsel for the Respondent pointed out that the company did not keep accounting records and that there was no supporting documentation for 1998 and 1999. She referred to the Appellant's burden of proof and to the decision of the Federal Court of Appeal in Njenga v. Canada, [1996] F.C.J. No. 1218 (Q.L.), at paragraph 3: The Income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make. We agree with that finding. Ms. Njenga as the Taxpayer is responsible for documenting her own personal affairs in a reasonable manner. Self written receipts and assertion without proof are not sufficient. [26] Counsel pointed out that despite a lack of supporting documentation, the auditor had allowed the substantial amounts. [27] With regard to the penalty imposed under subsection 163(2) of the Act, she pointed out that the penalty was only imposed in relation to the unreported income. She referred to the decision of the Federal Court - Trial Division in Venne v. Canada(Minister of National Revenue), [1984] F.C.J. No. 314 (Q.L.), and to the following passage in particular: ... "Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. ... [28] Counsel pointed out that a person who has carried on a business for nearly 20 years must know that it is necessary to keep accounting records and to save invoices for a certain number of years. She referred to section 230 of the Act: 230(1) Records and books - Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person's place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined. [29] She also referred to my decision in Lévesque Estate v. Canada, [1995] T.C.J. No. 469 (Q.L.), at paragraph 14: Ignorance or failure to obtain adequate information could in certain circumstances be a sufficient element to constitute gross negligence, particularly in cases where there is an economic interest in remaining ignorant. Here, the element that tilts the scales in favour of accepting the taxpayer's position is that there was no economic interest in this omission or in this failure to obtain adequate information. Conclusion [30] Throughout the entire hearing, the Agent for the Appellant addressed the subject of his personal assessment. Unfortunately, that assessment is not the subject of this appeal. Each assessment is reviewed on its respective merit. [31] With regard to the assessments under review in this appeal, the Agent for the Appellant does not contest the statement of expenses the auditor established. I am completely satisfied with the auditor's explanation concerning the $9,815 that was added to the unreported income for the 1998 taxation year. In addition, Exhibit I-1 shows that the Appellant agreed with the amount of unreported income that was added to his income for 1998, and with the disallowed expense amounts. [32] I believe that the penalty imposed pursuant to subsection 163(2) of the Act was imposed correctly. The evidence revealed that the Appellant showed gross negligence with regard to bookkeeping and a blatant disregard for the application of the Act. [33] Therefore, the appeal is dismissed. Signed at Ottawa, Canada, this 30th day of December 2003. "Louise Lamarre Proulx" Lamarre Proulx, J. Translation certified true on this 12th day of April 2004. Sharlene Cooper, Translator