Tax Court of Canada Judgments

Date: 20000613

Docket: 1999-194-IT-I; 1999-245-IT-I

BETWEEN:

DANIEL DUMAS,

LES ENTREPRISES DANIEL DUMAS INC.,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

P.R. Dussault, J.T.C.C.

[1]            These appeals were heard together under this Court's informal procedure in accordance with the election made by both the appellant corporation and the appellant Daniel Dumas in their notices of appeal. The appellant Daniel Dumas's motion of April 13, 1999 to have the general procedure govern his appeals was dismissed by an order issued on July 14, 1999.

[2]            The appellant Les Entreprises Daniel Dumas Inc. ("EDD Inc.") instituted an appeal from the assessments made for the 1994, 1995 and 1996 taxation years, which ended on May 31 each year. The points at issue concern additional income of $14,084, $95,636 and $83,073 for those years respectively as well as the related penalties assessed under subsection 163(2) of the Income Tax Act (the "Act"). The unreported income added allegedly came from Les Tourbes Nirom Peat Moss Inc. ("Nirom Inc.").

[3]            Daniel Dumas's appeals concern assessments for the 1993, 1994 and 1995 taxation years. According to amendments made to the Amended Reply to the Notice of Appeal by counsel for the respondent at the hearing, the matter concerns amounts of $4,512, $24,108 and $90,227 added to the appellant's income for 1993, 1994 and 1995 respectively as well as the related penalties assessed under subsection 163(2) of the Act. The amounts added to the appellant's income were so added in respect of taxable benefits received from EDD Inc.

[4]            Daniel Dumas is EDD Inc.'s sole shareholder and director. The corporation sells and markets peat moss produced by four companies which are shareholders of Nirom Inc. As a shareholder of one of the four corporations, Daniel Dumas has a 20 percent indirect interest in Nirom Inc. EDD Inc.'s revenue came from Nirom Inc. and was paid to it by the latter either as commissions or as transportation expenses or as a service loan. As is the case for EDD Inc., Nirom Inc.'s taxation year ends on May 31 of each year.

[5]            Subparagraphs 7 (c) and (d) of the Amended Reply to the Notice of Appeal in the case of EDD Inc. (1999-245(IT)I) contain the following allegations:

[TRANSLATION]

7.              In making the reassessments in issue, the Minister made in particular the following assumptions of fact:

(c)            the appellant's balance sheet for each of the years was balanced with the "Owed to director" account;[1]

(d)            as the "Owed to director" account on the appellant's books was a dummy account,

(i)             the appellant's expenses were overstated by the amount of the shareholder's personal expenses;

(ii)            and the appellant's income was understated.

[6]            Daniel Dumas and Richard Brillant, C.A., testified for the appellants. Marie-Claude Marcoux, a technical adviser who conducted the audit, and Jeannine Claveau, an appeals officer, testified for the respondent.

[7]            As a result of calculations made by the appellants' accountant, Richard Brillant, C.A., based on the financial statements of EDD Inc. and Nirom Inc. (Exhibit A-1), Mr. Dumas admitted that certain amounts of income received by EDD Inc. had not been reported although they had been deducted by Nirom Inc. These included, for EDD Inc.'s 1994 taxation year, an additional amount of $1,487 received as revenue from transportation, for the 1995 taxation year, an additional amount of $83,593 received by EDD Inc. as commissions, for EDD Inc.'s 1996 taxation year, and an additional amount of $3,470 also received as commissions.

[8]            Mr. Dumas also admitted that the same amounts should be included in his personal income for each of the years 1993, 1994 and 1995 respectively.

[9]            Mr. Dumas emphasized that EDD Inc. and he had acted in good faith at all times and that it had been admitted that the aforementioned amounts had been received but not reported, and so the assessed penalties should be set aside in both cases.

[10]          In his testimony, Daniel Dumas first complained about the absence of any real communication with Ms. Marcoux during the audit conducted in the fall of 1996 and winter of 1997. He stated that, for the purposes of the audit, all the amounts deposited at the bank had been considered as income whereas he had received non-taxable amounts, in particular damages in connection with an accident his wife had had in Virginia. However, Mr. Dumas adduced no specific evidence that such amounts were received. The relation between these amounts and those assessed was not established either. Mr. Dumas referred as well to the expenses initially disallowed which he said had been the subject of an agreement made following the objections to the assessments in 1998.

[11]          With respect to the unreported income, Mr. Dumas stated that he had been told [TRANSLATION] "that everything that didn't balance would be included in income" and that [TRANSLATION] "things would balance out elsewhere". He also said that he had sent extensive documentation on all transactions and that officials had refused to meet his representative on the pretext that the matter was already closed.

[12]          With the aid of Exhibit A-1, and more particularly its first three pages, Mr. Dumas then traced the only amounts which, according to him, had not been included in EDD Inc.'s income but had been deducted by Nirom Inc. as either commissions or transportation expenses. These were the above-mentioned amounts of $1,487, $83,593 and $3,470 for EDD Inc.'s 1994, 1995 and 1996 taxation years. The explanations provided as to why these amounts had not been included in EDD Inc.'s income remained quite vague. My understanding of Mr. Dumas's testimony regarding 1994 and 1995 is that the non-included income represented year-end adjustments with respect to commissions in 1994 and with respect to transportation in 1995, whose amounts were allegedly paid later. For 1996, the amount of $3,470 was said to represent an additional payment of an advance on commissions. He said there had been 27 payments instead of 26 and that there had simply been an omission to add the additional payment to income for the year.

[13]          In cross-examination, Mr. Dumas said he was EDD Inc.'s only director and that he had been responsible for keeping the books, although he had not made all the entries himself over the years in issue. Another person made the entries in 1995 and 1996. However, he was the only person who signed the cheques. Mr. Dumas was one of four directors of Nirom Inc; he did not make book entries but did sign the cheques.

[14]          Counsel for the respondent had Mr. Dumas file a number of documents in evidence, including EDD Inc.'s annual financial statements for the years in issue (Exhibits I-2, I-3 and I-4), a record of transfers made by EDD Inc. to Mr. Dumas from January 1 to December 31, 1993 (Exhibit I-1), a statement of revenue and expenditure concerning the transportation of peat moss by EDD Inc. for Nirom Inc. from June 1994 to May 1995 (Exhibit I-5) and a cheque for $6,518.68 dated May 31, 1995 made out by Nirom Inc. to EDD Inc. (Exhibit I-6). Counsel for the respondent tried to show by these means that only the amount of $6,518.68 was included in EDD Inc.'s income as representing the transportation revenue for May 1995, whereas an amount of $95,568.68 should have been so included, a difference of $89,050.

[15]          Richard Brillant is the appellants' accountant and a partner with Groupe Malette Maheu. He became involved in the appellants' files toward the end of the audit conducted by Ms. Marcoux of Revenue Canada in 1998. However, it was Raymond Malenfant from the same firm who undertook a review of EDD Inc.'s financial statements based on information provided by Mr. Dumas during the years in issue. It was mainly with Mr. Malenfant that Ms. Marcoux communicated in the course of her audit.

[16]          According to Mr. Dumas, Mr. Malenfant had serious heart trouble on two occasions and was only working part time. For this reason, the appellants' files were transferred to Mr. Brillant in early 1998. Mr. Dumas testified that this was also the reason why Mr. Brillant had been called as a witness, not Mr. Malenfant.

[17]          In his testimony, Mr. Brillant tried, with the aid of Exhibit A-1 which he himself had prepared, to explain that only the admitted amounts of $1,487, $83,593 and $3,470 had not been reported by EDD Inc. for 1994, 1995 and 1996 respectively. Thus, with respect to the 1995 taxation year, Nirom Inc.'s comparative financial statements for 1995-1994 (Exhibit A-1, page 13) show that transportation expenses amounted to $1,207,102, while commissions paid totalled $186,615.[2] Nirom Inc.'s comparative financial statements for 1996-1995 (Exhibit A-1, page 23) show transportation expenses of $1,293,102 and commissions of $100,615 for 1995. According to Mr. Brillant, the difference of $86,000 added to Nirom Inc.'s transportation expenses was not, subject to adjustment, included in EDD Inc.'s income. And yet, in the reconciliation exercise represented by Exhibit A-1, the commission income included in EDD Inc.'s income for the 1995 taxation year was apparently $75,435, while the transportation income was only $1,207,102 (Exhibit A-1, page 2). On the same page, it is indicated that Nirom Inc. claimed an expense of $161,745 in respect of commissions paid.[3] If an amount of $2,717 representing commissions paid to third parties is subtracted, the balance of $159,028 should have been included in EDD Inc.'s income. However, as only $75,435 was included, Mr. Brillant determined that the unreported commission income was $83,593. He also set Nirom Inc.'s transportation expense at $1,207,102, that is, the same amount as that which he indicated as being EDD Inc.'s transportation income (Exhibit A-1, pages 2 and 10). And yet, as stated above, although the amount of $1,207,102 is that shown as Nirom Inc.'s transportation expense for 1995 in its 1995-1994 comparative statements (Exhibit A-1, page 13), it is the amount of $1,293,102 that appears in the 1996-1995 comparative statements (Exhibit A-1, page 23).

[18]          However, Exhibit I-5 shows total transportation income of $1,123,018.68 for EDD Inc. for the fiscal year ended on May 31, 1995. That amount includes revenues of $6,518.68 entered for transportation for May 1995. Yet, Exhibit I-6 shows a total of $95,568.68 for transportation for May 1995. According to these last two documents, total transportation revenues for 1995 should therefore be $1,212,068.68, not the $1,123,018.68 shown in Exhibit I-5, or $1,207,102, the figure appearing in the 1995-1994 comparative financial statements (see Exhibit A-1 pages 2, 10, 12 and 13). Thus, according to these two documents alone, transportation income for the fiscal year ended on May 31, 1995 would be $4,966.68 greater than the amount indicated in the financial statements. This amount should normally be added to the unreported amount of $83,593 in revenue from commissions.

[19]          In addition, the T-20 report filed in evidence by Ms. Marcoux shows two additional adjustments to EDD Inc.'s transportation income for 1995: a $76,000 rebate paid on May 31, 1995 and an exchange rate adjustment of $8,091, for a total of $84,091. If this amount, which is consistent with the worksheets submitted by the taxpayer, is added to the transportation income of $1,212,069 mentioned above, one arrives at a total of $1,296,160 which was apparently received as transportation income by EDD Inc. in 1995 (Exhibit I-8, page 5). This amount is slightly greater than the $1,293,102 figure shown as Nirom Inc.'s transportation expense in the 1996-1995 comparative statements (Exhibit A-1, page 23).

[20]          Mr. Dumas explained in his testimony that the transportation expenses for a year were first of all billed at the rate agreed upon the previous year and that this rate was then periodically revised. He stated that certain year-end adjustments were thus required to reflect the expenses actually paid by Nirom Inc. and the amounts received by EDD Inc. on that account.

[21]          If the transportation expenses of $1,293,102 and commissions of $100,615, shown in Nirom Inc.'s comparative statement for 1996-1995, are added for the 1995 taxation year, we obtain a total of $1,393,717 (Exhibit A-1, page 23). This total reduced by an amount of $2,717 for commissions paid to a third party (Exhibit A-1, page 2), namely $1,391,000, should normally be shown as revenue of EDD Inc. for 1995 in its 1996-1995 income statement. Yet, a figure of $1,282,537 is indicated: $75,435 as commission income and $1,207,102 as transportation revenue (Exhibit A-1, page 16). The difference is $108,463. The same difference is obtained, still taking into account the commission expenses paid to a third party, when the figures in the comparative statements of EDD Inc. and Nirom Inc. for 1995-1994 (Exhibit A-1, pages 12 and 13) are compared. The difficulty stems both from the fact that, in Nirom Inc.'s financial statements, commissions paid were subsequently transformed into transportation expenses and from the fact that a portion of the $186,615 in total commissions paid, namely $24,870, represents "commissions US". If the "commissions US" do not constitute income for EDD Inc., as Exhibit A-1 suggests, the traced difference of $108,463, less this amount of $24,870, yields the result which Mr. Brillant reached, that is, $83,593. However, the transformation of a portion of the commissions, only part of which would have gone to EDD Inc., into transportation expenses normally payable by Nirom Inc. exclusively to EDD Inc. should have resulted in an increase in the latter's income.

[22]          Thus, as may be seen, the amendments or corrections made to the figures shown in the various documents and in the income statements create an enormous amount of confusion and make difficult any precise and accurate reconciliation.

[23]          For 1994 and 1996, the explanations given were brief. The figures used in Exhibit A-1 correspond to those appearing in the income statements of Nirom Inc. and EDD Inc. According to those documents, unreported income amounted to only $1,487 for the 1994 taxation year and $3,470 for the 1996 taxation year. However, it is difficult to take the exercise any further since the explanations provided by Mr. Dumas and Mr. Brillant essentially concerned a reconciliation that was attempted between the expenses claimed by Nirom Inc., based on its income statements, in respect of transportation expenses and commissions and the revenue reported by EDD Inc., also based on its income statements. First, since what is involved is unreported income, a simple comparison of income statements does not necessarily provide an overall picture of the situation since amounts not reported by EDD Inc. were not necessarily deducted by Nirom Inc. and are therefore not necessarily represented in its income statements.

[24]          But there is more. The reconciliation exercise which Mr. Dumas and Mr. Brillant conducted was not at all intended to demolish the allegations of fact made in subparagraphs 7 (c) and (d) of the Reply to the Notice of Appeal, which are reproduced in paragraph [5] of these reasons. Those allegations are that the corporate appellant's balance sheet was balanced with the "Owed to director" account and that since that account was a dummy account, the expenses were overstated and, more important for us here, income was understated. Exhibit A-1, on which Messrs. Dumas and Brillant relied and which contains some 28 pages, provides no explanation on this point.

[25]          It was in fact by analyzing EDD Inc.'s "Owed to director" account and the transfers made to Mr. Dumas that the auditor, Ms. Marcoux, came to the following conclusions: (1) that EDD Inc. had understated its revenues, (2) that EDD Inc. had overstated its expenses by paying certain personal expenses of its sole shareholder Mr. Dumas, and (3) that EDD Inc. had made large transfers to Mr. Dumas of amounts that were not owed him. As the figures shown in the worksheets prepared by Mr. Dumas himself and given to Ms. Marcoux differed significantly from those appearing in the financial statements, Ms. Marcoux proceeded with an in-depth analysis of income and expenses since the accountant at the time, Mr. Malenfant, had apparently told her that the balance of the "Owed to shareholder"[4] account [TRANSLATION] "was established by determining the difference in order to balance the balance sheet" (Exhibit I-8, page 4). (See also Exhibits I-1 to I-4 and I-12 to I-14.) Apart from the payment of certain personal expenses, Ms. Marcoux determined the existence of additional revenues of EDD Inc. of $21,744, $95,636 and $100,435 for the 1994, 1995 and 1996 taxation years respectively. The question of personal expenses was settled at the objection stage. As for the discrepancies in the "Owed to shareholder"[5] account attributable to additional revenues, Ms. Marcoux determined that, for 1995, these discrepancies were in respect of, among other things, unreported transportation income of $89,058 referred to above.[6] For 1996, she determined that an amount of $2,621 had not been reported as commission income and that amounts totalling $85,793 entered as additional capital investment by the shareholder and reported as such by the accountant did not correspond to Mr. Dumas's actual investments, but were simply cash transfers by EDD Inc. into its own investments.

[26]          Two adjustments were subsequently made to the additional income initially determined for EDD Inc.'s 1994 and 1996 taxation years and they actually correspond to investments by Mr. Dumas. The amounts concerned are $7,660 for the 1994 taxation year and $17,362 for the 1996 taxation year. The amounts of additional revenue were thus reduced by those amounts for those two years and are now $14,084 and $83,073 for those years respectively. The $95,636 figure remained unchanged for the 1995 taxation year.

[27]          Neither Mr. Dumas nor Mr. Brillant commented on the calculations shown in Exhibit I-8. In her testimony, Ms. Marcoux also explained the analytical work on the basis of which she had determined that transfers of funds from EDD Inc. constituted taxable benefits received by Mr. Dumas in the 1993, 1994 and 1995 taxation years. Once again, the analysis focused on changes in the "Owed to director" account, having regard to EDD Inc.'s financial statements and the worksheets filed by the accountant and prepared by Mr. Dumas himself (Exhibits I-1, I-11, I-12 and I-13). As stated above, significant differences were noted between the figures shown in the worksheets and those in the financial statements. Ms. Marcoux concluded from this that the balance of the "Owed to director" account shown in the financial statements was fictitious, that it had been used to balance the balance sheet and that it in fact represented unreported income and personal expenses of Mr. Dumas paid by EDD Inc.

[28]          Ms. Marcoux also noted large transfers from EDD Inc. to the shareholder's personal account after the end of each year in order to cancel the account's balance. She thus observed transfers of $60,000 in July 1994, $130,000 in July 1995 and $105,191 in July 1996.

[29]          Analyzing next all the transfers made to Mr. Dumas each month for the periods from June to December 1993, January to December 1994 and January to December 1995 (see Exhibit I-16), Ms. Marcoux determined that Mr. Dumas had appropriated funds totalling $12,172, $24,108 and $90,227 for 1993, 1994 and 1995 respectively. The amount of $12,172 initially assessed for 1993 was subsequently reduced to $4,512 to reflect two capital investments made by Mr. Dumas in EDD Inc. on November 23, 1993, one of $2,660 and the other of $5,000, for a total of $7,660 (see Exhibit I-17, page 6). The adjustment to EDD Inc.'s unreported income for its 1994 taxation year to reflect this amount of $7,660 is mentioned above.

[30]          The other adjustment, of $17,362, made to EDD Inc.'s unreported income for its 1996 taxation year was not taken into account in the assessment for Mr. Dumas's 1995 taxation year since the transfer or investment by Mr. Dumas was made in April 1996 (Exhibit I-17, page 6).

[31]          The testimony of Jeannine Claveau, the appeals officer, essentially corroborated Ms. Marcoux's testimony. Ms. Claveau stated that she had not found it normal that EDD Inc. had incurred operating losses in its 1995 and 1996 taxation years and that, being basically a service-providing company, it had not had all its expenses reimbursed by Nirom Inc.

[32]          Ms. Claveau also explained that all the expenses and balance sheet items had been audited and that the balance sheet did not balance except with the "Owed to director" account. She said that all the other items "balanced". Ms. Claveau also stated that the matter of the expenses had been settled and that the adjustments to unreported income had been made on the presentation of evidence that actual capital investments had been made by Mr. Dumas. These were the adjustments referred to above. According to Ms. Claveau, there was no other evidence that Mr. Dumas had made additional investments in EDD Inc.

[33]          The explanations provided by Ms. Marcoux and Ms. Claveau concerning their analyses of the financial statements, and more particularly of the "Owed to director" account, were not directly contradicted by Mr. Dumas or Mr. Brillant. Mr. Dumas in fact was content with getting Ms. Claveau to admit that entertainment expenses necessarily had to be incurred in order to market and sell peat moss around the world.

[34]          As stated above, the reconciliation done by Mr. Brillant (Exhibit A-1) concerned only EDD Inc.'s income statements as compared with those of Nirom Inc. and the document filed in evidence contains absolutely no useful information respecting the "Owed to director" item, the analysis of which was the factor that triggered the assessments.

[35]          Upon analysis of the testimony and the documentary evidence presented by the appellants, I am certainly unable to conclude that they showed on a balance of probabilities that the assessments made were incorrect with respect both to EDD Inc. and to Mr. Dumas personally.

[36]          As to the penalties assessed under subsection 163(2) of the Act, the reasons given were that Mr. Dumas, being the only person doing EDD Inc.'s bookkeeping, could not have been unaware that the results reported in the financial statements contained false statements and, more particularly, that the balance of the "Owed to shareholder" account shown in the financial statements did not correspond to what was indicated in his own worksheets. The size of the unreported amounts relative to the taxable income reported was also considered. Lastly, Mr. Dumas's appropriation of funds when he knew, given the documents he himself had prepared, that EDD Inc. did not really owe him the amounts that had been transferred to him, was taken into consideration by Ms. Marcoux in her report on this point (see Exhibit I-8).

[37]          Considering the evidence adduced and having regard to the reasons given, I find that the false statements could only have been made knowingly and that this alone is sufficient reason to uphold the penalties.

[38]          I will add in closing that, as counsel for the respondent emphasized, in the circumstances of these cases, a negative inference can very definitely be drawn from the fact that Mr. Malenfant, the appellants' accountant who prepared the financial statements, was not called as a witness. On this point, reference may be made to, inter alia, Enns v. M.N.R., 87 DTC 209 and the authorities cited. I do not find sufficient the reasons given by Mr. Dumas for not asking Mr. Malenfant to testify.

[39]          As a result of the foregoing, the appeals of Les Entreprises Daniel Dumas Inc. for the 1994, 1995 and 1996 taxation years and the

appeals of Daniel Dumas for the 1993, 1994 and 1995 taxation years are dismissed.

Signed at Ottawa, Canada, this 13th day of June 2000.

"P.R. Dussault"

    J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 30th day of April 2001.

Erich Klein, Revisor

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