Date: 19990908
Docket: 98-2591-IT-I
BETWEEN:
ALAIN RUEST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1] This is an appeal from assessments for the 1993, 1994 and 1995 taxation years. The assessments were made using the net worth method. In making the reassessments for the years in issue, the Minister of National Revenue (the "Minister") made in particular the following assumptions of fact:
[TRANSLATION]
(a) the appellant reported no business income for the 1993 taxation year;
(b) the appellant reported the following business income for the 1994 and 1995 taxation years:
Taxation year Gross income Net income
1994 $10,000 $ 9,031
1995 $35,085 $21,185
(c) the appellant had a horse-selling business during the years in issue;
(d) the appellant kept no books for his business;
(e) the Minister audited the appellant's affairs using the net worth method;
(f) the amount of unreported income was determined using the net worth method (a copy of the appellant's statement of net worth . . . as schedules 1, 2, 3 and 4);
(g) the amounts not reported by the appellant which were subject to the federal penalty for negligence are as follows:
Taxation Amounts subject
year to penalty
1993 $ 6,745.99
1994 $16,540.07
1995 $23,100.97
(h) by thus failing to report his income, 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 the returns of income filed for the 1993, 1994 and 1995 taxation years, as a result of which the tax which he would have been required to pay based on the information provided in the returns of income filed for those years was less than the amount of tax actually payable for those years;
(i) as a result of the appellant's failure to report all his income, the Minister assessed the following penalties in accordance with subsection 163(2) of the Act for the 1993, 1994 and 1995 taxation years:
Taxation Penalty
year assessed
1993 $1,586.32
1994 $2,503.00
1995 $3,892.74
[2] The points at issue are clearly stated in paragraph 8 of the Reply to the Notice of Appeal, as follows:
[TRANSLATION]
(a) to determine whether the appellant correctly reported all his income for the 1993, 1994 and 1995 taxation years;
(b) to determine whether the Minister was correct in assessing a penalty against the appellant under subsection 163(2) of the Act for the 1993, 1994 and 1995 taxation years.
[3] The appellant testified in support of his appeal and also called one Pierre Paquette and his accountant, Mr. Lemay, as witnesses. The appellant identified himself as a self-employed worker. In 1993, he worked a few months and became eligible for unemployment insurance benefits. In 1994 and 1995, he did work involving racehorses. This activity consisted in buying, selling and racing horses. The purses and the profits on horse transactions provided him with most of the income he needed to live. The evidence in this regard is more than a little sketchy.
[4] The assessments were made using the net worth method as the appellant had no bookkeeping or accounting system for his business. As the appellant's income was not sufficient to justify his expenses and assets, Revenue Canada concluded that he had received and benefited from income greater than that which he had reported.
[5] In rebuttal, the appellant essentially contended that he had used capital of more than $30,000 received from two different sources. The first source, representing $20,000, was the sale of a portion of his hockey card collection in Mississauga through his friend Pierre Paquette. Mr. Paquette moreover testified and confirmed the appellant's claims, completing his testimony with a detailed written description of the items and series sold and the amounts obtained for each series (Exhibit A-1).
[6] Second, the appellant stated that he had received a gift of $10,000 from his father in anticipation of the purchase of a residence which in the end he never bought.
[7] In the appellant's view, this capital contribution of more than $30,000 explained and justified the observed discrepancies forming the basis of the assessments. The evidence also established that the appellant made very little use of his bank accounts in his economic activities, but dealt more often than not in cash.
[8] A number of withdrawals were questioned, in particular those of February 15, 1993 ($2,525), February 28, 1995 ($3,746), April 12, 1995 ($5,000) and September 13, 1995 ($5,000). The evidence did not reveal the details concerning the use of these funds. The appellant testified that the funds were used either for his personal needs or to pay costs and expenses related to the horses he owned.
[9] The evidence established that the appellant had reported very modest income for the years prior to the years in issue: $5,782 in 1988, $5,934 in 1989, $9,994 in 1990, $12,320 in 1991 and $15,698 in 1992.
[10] The appellant reported the following income for the years in issue: $8,306 for 1993, $7,930 for 1994 and $31,249 for 1995. In 1993, the appellant worked for only a very brief period of time, from March to July, after which he collected unemployment insurance benefits until he was no longer eligible.
[11] Subsequently, although a neophyte in the field, he became interested in racehorses on the advice of a friend. He apparently lived off the proceeds of race purses and profits made on various horse transactions.
[12] The evidence also showed that the appellant owned or had owned a number of motor vehicles during the periods in issue.
Capital assets: 1992 1993 1994 1995
Automobiles:
1979 Pontiac Trans Am 5,500.00 5,500.00 5,500.00
1984 Honda Prelude 1,500.00 1,500.00 1,500.00 1,500.00
1992 Jimmy Blazer 29,250.70 29,250.70 29,250.70 29,250.70
Motorcycles:
1993 Harley Davidson FLST 18,605.16 18,605.16
1995 Harley Davidson FLST 21,825.62 21,825.62
1965 Harley Davidson 1200 500.00
1957 Harley Davidson 1200 1,110.00
Snowmobiles:
1993 Ski-Doo Mack Z 11,236.00
1993 Ski-Doo Mack XTC 9,167.20 9,167.20 9,167.20
Suzuki ATV 300.00 300.00 300.00 300.00
________________________________________________
66,891.86 64,323.06 67,543.52 63,153.52
Total assets 77,513.58 65,565.74 78,852.87 79,627.39
[13] In tax law, the burden of proof is on the appellant, who must show on the balance of evidence that his claims are valid. To do so, he must demonstrate by means of coherent and plausible evidence that those claims rest on a credible and verifiable foundation.
[14] An assessment made using the net worth method supposes an analysis and consideration of a number of components relating to a period of one or more years. The result of the exercise is the revelation of certain discrepancies which generally provide the basis for the assessment. The easy, or indeed simplistic, reply or response to explain the discrepancy or discrepancies is to say that there was a sudden, new cash inflow which explains and justifies everything.
[15] This is of course possible and plausible, but nevertheless requires a degree of reliability in which there is little room for doubt. In other words, this kind of verbal evidence, supported by writings of dubious quality, definitely requires corroboration from a source beyond the control of the person benefiting from the cash contribution.
[16] Furthermore, I think it equally important to be able to show how and how often the amounts received were used or spent. In other words, a taxpayer who receives some substantial amount of money will have to demonstrate the manner in which the funds were used. The explanation that the funds were deposited and kept in a safe-deposit box or held in the form of cash in the home for use if needed is not very convincing.
[17] Saying that capital was obtained from a very particular or exceptional source in order to explain and justify all discrepancies or operations that do not balance may raise doubts concerning plausibility.
[18] In the instant case, the appellant certainly explained and justified the mathematical discrepancies by saying that he had received a cash inflow of $30,000 (from the sale of hockey cards and a gift from his father). Is this evidence, consisting essentially of testimony by the appellant and Pierre Paquette, decisive? Should the Court be satisfied with this explanation and find in the appellant's favour?
[19] I would say at the outset that I very much doubt the likelihood of this cash inflow. It would have been helpful to have corroborated this explanation in order to substantiate and strengthen it, given the fact that it was a very particular explanation, but also a surprising one as to the accuracy of the total amount and the strategic moment when the appellant was able to benefit from it.
[20] It appeared to me to be equally surprising that the appellant did not reveal earlier on that he had had the benefit of such a cash inflow. Indeed, the evidence showed that the discussions and negotiations were at a very advanced stage when the two amounts totalling more than $30,000 were first mentioned.
[21] In view of the income reported by the appellant both during and prior to the years in issue, I am very sceptical and puzzled as to the truth concerning this capital contribution. It is possible, indeed easy to forget a cash inflow of a few hundred dollars. However, where the amounts represent the total of several years' taxable income, questions arise if the recipient claims to have forgotten them.
[22] As noted above, Revenue Canada uses the net worth method in making an assessment where it is unable to assess on the basis of standard accounting methods, that is to say, by means of an accounting supplemented by the appropriate supporting documentation. However, the fact that this is a special assessment procedure in no way alters the prevailing rule with respect to challenging the assessment's validity before the Tax Court of Canada: the burden of proof is still on the appellant.
[23] In disputing an assessment based on the net worth method, appellants often seem to believe they need only point out a few weaknesses, errors or defects in the assessment process in order to completely disprove their validity.
[24] I think it important to point out that an assessment made by means of the net worth method is the result of an evaluation based on a set of components provided in part by the taxpayer himself but which also come from certain discoveries, from statistical information, and lastly, from essentially mathematical deductions.
[25] The component data are usually questioned or disputed by one party or the other. Following the discussions and negotiations, if the taxpayer is still not satisfied with the assessment, he may institute an appeal before this Court. He must in that case show that his income balances with the detailed statement of his expenses.
[26] In the instant case, the appellant essentially took issue with the fact that the respondent should have found it strange that he had borrowed to purchase a motor vehicle rather than use his available funds. It is indeed not unusual or unreasonable to purchase a vehicle by means of a loan even if one has all or some of the money needed. However, I would point out that the burden was on the appellant, not the respondent, to justify or explain the use of the funds stated to be available.
[27] Since the assessments resulted from the observed discrepancy between income and expenses relative to capital or assets, the burden was solely on the appellant to explain that discrepancy. To convince the Court, he had to show on the balance of evidence that his claims were plausible, reasonable, correct and coherent. It was not enough to criticize and raise certain minor grievances in order to enable the Court to conclude that everything balanced as a result of the amount received at a particular moment.
[28] This, I agree, might have required a colossal amount of work, but it should nevertheless be pointed out that a taxpayer assessed by means of the net worth method is himself responsible for the manner in which he has been assessed in that he deliberately and knowingly chose not to have any accounting system and to keep no record of his income and expenses.
[29] After the lack of consistency was raised against him, the appellant suddenly contended that he had received an amount of approximately $30,000 at the start of the reference period, explaining that he had obtained this amount through the sale of hockey cards and a gift from his father.
[30] I did not believe the appellant's explanations respecting that capital contribution. First of all, the explanation was late in coming. Second, the sheer chance and the coincidence that the amounts were what they were cast doubt on the whole thing. Lastly, the money became available at exactly the right time. That represents many strokes of good fortune and coincidences. Even so, it was not impossible. The appellant should have known that his highly unusual explanations would have triggered a certain scepticism. Consequently, he should have provided fuller and more convincing evidence as to the source of the $30,000 capital amount.
[31] Why did he refuse to answer the questions asked by the auditor of his case? Why did he require that all the information be screened by his accountant? Why did he not mention the source of the $30,000 at the very outset? Why did he contend that he never used credit cards? Why did he claim that a commission had been paid to Mr. Paquette, when Mr. Paquette himself stated that he had not received any commission?
[32] All these points do nothing to enhance the already poor quality of the evidence. Quite the contrary, they deprive it of the minimum quality required for it to be accepted.
[33] I also think it appropriate to mention certain facts which speak for themselves:
- The income reported compared to the motor vehicles owned;
- The passage under the heading [TRANSLATION] "Safe-deposit Box" in Schedule B to the Notice of Appeal reads as follows:
[TRANSLATION]
(1) Safe-deposit Box
I have had a safe-deposit box at the Caisse Populaire de St-Rédempteur since March 17, 1993 and Suzanne Gagnon is designated as attorney. The safe-deposit box is used solely to keep insurance policies and Suzanne Gagnon has never had access to the box even though she has been designated attorney.
[34] Exhibit I-6 establishes that the appellant visited his safe-deposit box 22 times between March 17, 1993 and August 22, 1996.
[35] I also think it appropriate to reproduce the content of headings 2, 3 and 4, which show quite clearly how easily the appellant is able to make untruthful statements:
[TRANSLATION]
(2) 1993 T4 Supplementary
This slip was prepared based on information which I had provided to my employer, indicating Suzanne Gagnon's address because I did not want to risk losing my job by giving my actual address.
(3) Purchase of a vehicle on October 14, 1992
Enclosed please find a letter signed by Mr. Carol Nadeau explaining why the address given was not the actual address.
(4) Driver's licence
I enclose a copy of my driver's licence issued on March 15, 1995 which indicates my actual address.
[36] In Schedule 1 for 1994, the appellant stated:
[TRANSLATION]
. . . there remains additional income of $1,540.07 which I consider is explained by an error in computing my travelling expenses for 1994.
. . .
[37] In Schedule 1 for 1995, the appellant stated:
[TRANSLATION]
. . . there remains additional income of $3,554.72 which I consider is explained by an error in computing my travelling expenses for 1995.
. . .
[38] Assessing the credibility of testimony is undoubtedly one of the most difficult aspects of our work and prudence demands that we consider the most objective elements possible rather than relying essentially on intuition. Consequently, a number of facts and elements should be considered in discounting the value of testimony.
[39] In this case, I am convinced on the balance of evidence that I should attach no value to the appellant's testimony. He took an enormous risk in deciding to adduce evidence consisting essentially of his own testimony and that of two persons over whom he clearly had ascendancy. To support, enhance or strengthen his explanations, he should have relied on something other than simply his testimony and that of Pierre Paquette. The burden of proof was on him in this regard. He had to show on the balance of evidence that his explanations were plausible and reasonable.
[40] As to the penalties, the burden of proof was on the respondent. Did she discharge the burden of showing that the penalties were validly assessed? My answer is that she did, in view of the fact that the appellant himself admitted he had concealed income. I refer to the Notice of Appeal for the 1995 taxation year dated October 2, 1998, the last paragraph of which reads as follows:
[TRANSLATION]
I agree that additional income of $3,555 should be considered for 1995.
[41] The appellant may not have had an obligation to have careful, detailed and exemplary accounting records in his possession. However, he did have an obligation to prove that his claims were plausible. On this point, the evidence adduced failed to convince me. Moreover, the evidence as a whole could be summarized in a single sentence: "Everything that did not balance could be explained by the $30,000."
[42] The respondent's evidence showed that the appellant made a number of untruthful statements for the obvious purpose of concealing income. In view of those untruthful statements, the total lack of cooperation, the size of the amounts at issue having regard to the income reported and the admission of gross errors, I conclude that the respondent discharged the burden of proof with respect to the assessment of penalties.
[43] For all these reasons, the Court dismisses the appeal and confirms that the penalties were validly assessed.
Signed at Ottawa, Canada, this 8th day of September 1999.
"Alain Tardif"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 21st day of July 2000.
Erich Klein, Revisor