Date: 20000324
Docket: 98-1230-IT-G
BETWEEN:
ANDRÉ BEAUCHESNE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Archambault, J.T.C.C.
[1] These are appeals from income tax assessments that were heard in very unusual circumstances. Before the hearing of André Beauchesne's appeals for the 1992, 1993 and 1994 taxation years (relevant taxation years) began, his counsel made a motion to the Court to be removed as counsel of record. He indicated that he was no longer authorized to represent Mr. Beauchesne and that Mr. Beauchesne would not be attending the hearing. However, he said that Mr. Beauchesne had told him that the Court was to hear the appeals in his absence.
[2] After the motion for removal as counsel of record was granted and the counsel in question left the courtroom, the hearing of Mr. Beauchesne's appeals began. Since the Minister of National Revenue (Minister) had assessed penalties under section 163 of the Income Tax Act (Act) for each of the relevant taxation years, I reminded counsel for the respondent that, under subsection 163(3) of the Act, the burden of establishing the facts justifying the assessment of the penalties was on him.
[3] After hearing the evidence adduced by the respondent, I rendered the following decision: the appeals from the assessments made under the Act for the 1992, 1993 and 1994 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that, for penalty calculation purposes only, he must deduct the following from the income to which the penalty applies: (i) the dues paid to the Federation of General Practitioners and (ii) the portion of entertainment expenses that is not eligible under section 67.1 of the Act. I also awarded the respondent all the costs provided for in Tariff B of the Tax Court of Canada Rules (General Procedure).
[4] The reasons for my decision, which I gave at the hearing, were that I basically agreed with the arguments made by counsel for the respondent (without summarizing them), except in respect of the two items already mentioned above. To explain my decision on those two items, I said that I was giving Mr. Beauchesne the benefit of the doubt as regards the non-eligible portion of the entertainment expenses—because we were dealing with a tax rule of which Mr. Beauchesne could have been unaware—and the amounts deducted twice for dues paid to the Federation of General Practitioners. The evidence had shown that those dues had been paid by the R.A.M.Q. but that the amounts thus paid had not been included in Mr. Beauchesne's income. It was possible that Mr. Beauchesne was not aware of that double deduction.
[5] Since Mr. Beauchesne is now requesting the reasons for my decision and was not able to hear the arguments made by counsel for the respondent because he was not present when his appeals were heard, I will summarize counsel's main arguments here. First of all, he argued that the income tax assessments should be maintained as is because there was no evidence tending to demolish the facts on which the Minister had relied in making his assessments. Those facts, as set out in paragraph 19 of the respondent's Reply to the Notice of Appeal, are as follows:
[TRANSLATION]
In making the reassessments for the 1992, 1993 and 1994 taxation years, the Minister of National Revenue assumed, inter alia, the following facts:
(a) During the years at issue, the appellant had two main sources of income, namely the professional income he earned as a doctor and rental income;
(b) The appellant's fiscal year as a doctor during the years at issue ended on January 31 of each year;
(c) During the years at issue, the appellant's accounting system was highly inadequate, since he did not keep any record of his income and expenses;
(d) The appellant prepared his own financial statements and hired an accounting firm to prepare tax returns based on those statements;
(e) The appellant had given the auditor reports from the Régie de l'assurance-maladie du Québec (R.A.M.Q.) that were incomplete and did not include all the amounts paid to him during the year;
(f) After the auditor obtained complete reports from the R.A.M.Q., significant discrepancies were noted between the amounts paid by the R.A.M.Q. and the professional income reported by the appellant, namely $22,189 in 1992, $27,543 in 1993 and $47,189 in 1994;
(g) Since the appellant could not explain the discrepancies, the amounts referred to in subparagraph 7(g) were added to his income for the years at issue;
(h) Amounts totalling $41,752 (1992), $36,172 (1993) and $26,795 (1994) were disallowed by the Minister as expenses for a variety of reasons, as set out below:
1992 1993 1994 Total
Disallowed expenses
Dues and donations $2,898 $2,450 $700 $6,048
Insurance $4,971 $4,836 $4,636 $14,443
Salaries and benefits $5,690 $1,398 $5,353 $12,441
Professional fees $3,799 $3,162 $1,561 $8,522
Automobile expenses $1,377 $1,926 $1,677 $4,980
Conventions and training $17,229 $18,942 $10,111 $46,282
Home office expenses $2,049 $2,110 $2,007 $6,166
Interest (carrying charges) $3,739 $1,348 $750 $5,837
TOTAL DISALLOWED
EXPENSES $41,752 $36,172 $26,795 $104,719
expenses claimed as professional fees were disallowed because they were personal expenses (e.g. funeral costs for the appellant's father, painting or music classes) and several amounts could not be justified by documents;
expenses claimed as donations and dues were disallowed, including a loan to the Club de golf de Baie-Comeau and the appellant's professional dues for membership in the Federation of General Practitioners of Quebec, which were paid by the R.A.M.Q. and which the appellant had already claimed;
payments of life insurance premiums were disallowed because they were personal expenses;
under "salaries", the appellant had included the employee's portion of contributions to the Quebec Pension Plan, of unemployment insurance premiums, and of premiums for the Régime de l'assurance-maladie du Québec and taxes, and those amounts were disallowed;
expenses claimed under "conventions and training" were disallowed because of a lack of vouchers or because they involved personal travel by or personal expenses of the appellant; the appellant had also claimed the non-eligible 20% of restaurant or entertainment expenses;
amounts claimed for the use of the appellant's home were disallowed because his principal place of business was at the Médicentre Boréal;
certain expenses for the use of an automobile were disallowed because the vouchers showed expenses for two different vehicles;
amounts claimed for interest on a credit line were disallowed because they were inconsistent with his personal expenses;
(i) Amounts of $25,020 (1992), $29,202 (1993) and $24,973 (1994) that the appellant had reported as rental losses on immovable property in St-Augustin-de-Desmaures were disallowed by the Minister because there was no reasonable expectation that a profit would be made from renting that single-family home during the years at issue;
(j) Since purchasing that home in 1990, the appellant has claimed $127,819 in losses over a period of five years;
(k) The annual rent collected for the house does not cover the mortgage interest;
(l) The appellant indicated that he could not increase the rent because he would then not have been able to rent the house, which shows that the property was generating all the income it could;
(m) Since the appellant has been preparing his own financial statements since the early 1980s, he ought to have known that, given their nature, he could not claim the expenses disallowed by the Minister for the years at issue;
(n) The R.A.M.Q. reports were very clear and made it possible for the appellant to report his professional income appropriately during the years at issue;
(o) Since the appellant knowingly, or under circumstances amounting to gross negligence, made false statements in his income tax returns for the 1992, 1993 and 1994 taxation years by not reporting all his income and by claiming non-deductible expenses for each of the years at issue (see table), penalties of $6,589, $5,083 and $6,831, respectively, were assessed under subsection 163(2) of the Income Tax Act:
|
1992 |
1993 |
1994 |
|
|
Expenses |
|||
|
Professional fees |
$949 |
$3,162 |
$1,561 |
|
Dues and donations |
$1,668 |
$2,450 |
$700 |
|
Conventions and training |
$17,229 |
$18,942 |
$10,111 |
|
Total |
$19,846 |
$24,554 |
$12,372 |
|
Income |
|||
|
R.A.M.Q. |
$29,047 |
$15,913 |
$39,114 |
|
Amount subject to penalty |
$48,893 |
$40,467 |
$51,486 |
[6] With regard to the assessment of penalties, counsel for the respondent drew a distinction between the income from the R.A.M.Q. that Mr. Beauchesne did not report and the personal expenses he deducted. It must be remembered that the Minister had to prove that Mr. Beauchesne had knowingly or under circumstances amounting to gross negligence made a false statement or omission in his income tax returns (subsection 163(2) of the Act).
[7] In support of his arguments, counsel stressed the magnitude of the personal expenses deducted by Mr. Beauchesne. For the three relevant taxation years, they add up to $104,119, of which $56,772 was subject to the penalty provided for in subsection 163(2) of the Act. The most substantial item among the disallowed expenses that gave rise to penalties is conventions and training expenses, which total $46,282 for the three years.
[8] In addition to being substantial, those expenses are totally bizarre: obviously, they could not be considered legitimate in computing professional income. They include funeral expenses for his father, the cost of painting and music classes for his spouse, the cost of hockey school and hockey equipment for his son, expenses for skiing in Charlevoix, the cost of buying a snowboard and expenses for trips down south.
[9] Moreover, counsel for the respondent noted that the expenses deducted in 1994 were so deducted even though the Minister's auditor had previously told Mr. Beauchesne that many of the expenses deducted for 1992 and 1993 were personal in nature. The Minister's auditor had asked him to prepare a statement of all his income and expenses for 1994. The personal expenses deducted by Mr. Beauchesne included $951 for a music school, $390 for hockey school and $220 for painting classes.
[10] Moreover, for 1994, Mr. Beauchesne reported income that was $39,114 lower than the income he had actually been paid even though he knew that the Minister had already told him of discrepancies for the previous years. The unreported income for the three relevant taxation years amounts to $84,074. Counsel for the respondent argued that, if Mr. Beauchesne had wanted to know the actual amount of his income, he could have asked for a statement from the R.A.M.Q.—as the Minister's auditor did—to be set straight on the amount of his fees for his professional services.
[11] As regards the amounts representing the non-eligible portion of entertainment expenses, counsel for the respondent argued that Mr. Beauchesne ought to have been aware of that restriction.
[12] In the view of counsel for the respondent, the behaviour of Mr. Beauchesne, a doctor by profession, is that of someone who is determined to reduce his taxable income by any means possible. If Mr. Beauchesne did not knowingly fail to report all of his 1994 income and overstate his 1994 expenses by adding ones that were obviously personal in nature, he at least acted so negligently that we are clearly dealing with circumstances amounting to gross negligence.
[13] Moreover, counsel for the respondent pointed out a number of times that, if Mr. Beauchesne had taken the trouble to be present when his appeals were heard, he might have been able to explain certain aspects of his case to us: the absent are always in the wrong. Counsel for the respondent summarized his position as follows:
[TRANSLATION]
He wants to reduce it [his income] to the greatest extent possible by claiming things that are completely bizarre.
And he is well aware, he's a doctor . . . it's totally obvious that going skiing . . . in Charlevoix or Québec is not a professional expense.
But I say to myself that this man is going to such great lengths, and even though it was explained to him that he wasn't entitled to do so, he claimed the same type of expenses in 1994. Come on now! I think we can assume, in his absence, that he knew that that income was not fully reported. I'm talking about his income from the Régie de l'assurance-maladie du Québec.
Signed at Montréal, Quebec, this 24th day of March 2000.
"Pierre Archambault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 19th day of December 2000.
Erich Klein, Revisor