2020 QCCQ 2893, 2020 QCCQ 2893

Vafopoulos c. Agence du revenu du Québec 2020 QCCQ 2893 COURT OF QUEBEC (Civil Division) CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL No: 500-80-037846-186 DATE: August 11, 2020 ______________________________________________________________________ BEFORE THE HONOURABLE ENRICO FORLINI, J.C.Q. ______________________________________________________________________ IOANNIS VAFOPOULOS Plaintiff v. AGENCE DU REVENU DU QUÉBEC Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ 1.

Overview [ 1 ] Ioannis Vafopoulos appeals from notices of reassessment issued by the Minister of Revenue (‘’ Minister “) for the taxation years 2007 to 2011 in which the Minister decided that he was liable under

section 111 of the Taxation Act (CQLR, c. I-3 ) because as a shareholder, he received a benefit from 3173798 Canada Inc., a corporation which operated a restaurant. [1] [ 2 ] Between 1996 and May 2012, Mr.

Vafopoulos was president and a shareholder of 3173798 Canada Inc., a company that operated a La Belle Province restaurant franchise at 3945, Route 132, Sainte-Catherine, Québec (“ Restaurant ”). [2] [ 3 ] 3173798 Canada Inc. operated the Restaurant as a franchisee of the La Belle Province chain of fast-food restaurants, a chain controlled by the franchisor, the Papagiannis Group or corporations directly or indirectly controlled by the Group [3] . [ 4 ] The other shareholders of the Corporation were George Kikiris and members of the Papagiannis Group. [ 5 ] Sometime in 2011, the Agence du Revenu du Québec (the ‘’ Agency “) began an audit of the franchisor of the La Belle Province restaurants for undeclared sales and non-remittance of GST and PST following information received from a franchisee. [4] [ 6 ] This audit led the Agency to also conduct a tax audit of the franchisor’s franchisees, including 3173798 Canada Inc. [ 7 ] The Agency’s tax audit of 3173798 Canada Inc. lead it to conclude that the Restaurant systematically underreported its sales and did not remit the proper amount of goods and services tax (GST) and Québec sales tax (QST). [ 8 ] On March 18, 2013, the Minister issued notices of reassessment to 3173798 Canada Inc. for the taxation years 2007 to 2012 whereby it added substantial amounts of undeclared revenue to the corporation’s revenue and claimed $353,235 in back taxes, penalties and interest (“ Underlying Assessments ”). [5] [ 9 ] Using an indirect audit method, the Agency reconstructed the Restaurant’s sales by relying on its bread purchases and extrapolating this data to conclude that it under-reported income from 2007 to 2012. [ 10 ] On the same day, the Minister issued the Notices of Assessment to Mr.

Vafopoulos for the taxation years 2007 to 2011. [6] The Minister, relying on

section 111 of the Taxation Act (RLRQ, ch. I-3 ), concluded that as a shareholder, Mr. Vafopoulos received a benefit from the Corporation and added a portion of the Corporation’s undeclared income (equal to the percentage of shares he owned. i.e. 24 %) to his declared income. [ 11 ] The changes made in the Notices of Assessment are summarized below [7] : 2007 2008 2009 2010 2011 Declared income (line 275) $58,105 $50,690 $47,636 $46,222 $64,672

Appropriation of funds from 3173798 Canada Inc. $168,865 $220,610 $136,438 $24,746 $52,593 Revised net income (line 275) $227,375 $271,300 $184,074 $70,968 $117,265 [ 12 ] In addition, the Minister assessed Mr. Vafopoulos a penalty for gross negligence under

section 1049 of the Taxation Act for each of the taxation years 2007 to 2011 in the amounts below: 2007 2008 2009 2010 2011

Section 1049 Penalty $20,700.13 $26,486.98 $16,289.80 $2,533.05 $6,352.57 [ 13 ] In the Notices of Assessment, the Agency claims that Mr. Vafopoulos owes $252,532.16 in back taxes, penalties and interest. [ 14 ] In the same timeframe, the Agency issued similar notices of assessments to 3173798 Canada Inc.’s other shareholders, including to Mr. Kikiris.

Each shareholder was attributed a percentage of the undeclared income of the Corporation as per the Underlying Assessments on the basis of their respective level of share ownership. [ 15 ] In April 2013, 3173798 Canada Inc. filed a proposal under the Bankruptcy and Insolvency Act . [8] In September 2015, 3173798 Canada Inc. was formally declared bankrupt. As a result, no notice of objection was ever filed in regard to the Underlying Assessments and there was no appeal to the Court of Québec. [ 16 ] Mr.

Vafopoulos appeals the Notices of Assessment and argues: 16.1. 3173798 Canada Inc. correctly reported all income in its tax returns. The Agency was wrong to use an indirect audit method to reconstruct the Restaurant’s sales and taxes owed during the relevant time frame. Moreover, the methodology used by the Agency is not reliable because

i) the bread purchase information obtained from the Restaurant’s supplier is not dependable and ii) it relied on an incorrect bread spoilage rate to reconstruct the Restaurant’s sales; 16.2. The Minister was wrong to attribute to him a portion of the undeclared income of 3173798 Canada Inc. on the basis of his status as a shareholder of the Corporation (section 111 Taxation Act ). While he was a shareholder on paper, he derived no benefit from this status since, for all intents and purposes, he acted as a straw man or puppet for the Papagiannis Group who actually controlled 3173798 Canada Inc.

Therefore, the Minister erred in concluding that this is a case of shareholder appropriation; 16.3. The Minister was wrong to reassess him for the taxation years 2007 and 2008 as these taxation years are prescribed; 16.4. He was not grossly negligent in the statements he made in his personal tax returns for the taxation years 2007 to 2011. He was deceived and left to his own by the Papagiannis Group. He was perhaps guileless or naïve due to his low scholarliness, but his conduct did not come within the scope of conduct condoned by

section 1049 Taxation Act . [ 17 ] The Agency argues that the Restaurant consistently under-reported its sales during the relevant taxation years and that it was justified in reconstructing the level of sales based on an alternative audit method. It adds that the reconstructed sales are justified and that the Underlying Assessments are correct. [ 18 ] Moreover, it adds that the Minister was justified in applying sections 111 and 314 of the Taxation Act and adding a portion of the Corporation’s undeclared income to Mr. Vafopoulos’s personal income.

Further, it asserts that due to the taxpayer’s false statements, the 2007 and 2008 tax years are not prescribed and the Minister was warranted in levying the penalties under

section 1049 of the Taxation Act . [ 19 ] Mr. Vafopoulos’s appeal raises the following issues: 19.1. Has the taxpayer rebutted the presumption of validity of the Underlying Assessments? Specifically, did he adduce prima facie evidence establishing that the Agency erred in using an alternative audit method to reconstruct the Restaurant’s sales over the relevant taxation years and relied on unreliable data to reconstruct the sales? 19.2. Has the taxpayer rebutted the presumption of validity of the Notices of Assessment?

Specifically, did he adduce prima facie proof demonstrating that the Minister erred in concluding that he received a benefit from 3173798 Canada Inc. by virtue of his status as a shareholder of the Corporation? 19.3. Are the Notices of Assessment for the 2007 and 2008 taxation years prescribed? 19.4. Was the Minister justified in levying the penalties for gross negligence prescribed by

section 1049 of the Taxation Act ? 2. Analysis and Decision 2.1. Presumption of Validity of the Assessments and the Taxpayer’s Burden of Proof [ 20 ] Pursuant to

section 1014 Taxation Act , the Notices of Assessments are presumed or deemed to be valid. [ 21 ] To rebut or demolish this presumption of validity, a taxpayer must present prima facie evidence that the factual assertions on which rest the Minister’s assessments are wrong. If this is accomplished, the burden of proof is reversed and the Minister must by preponderance of proof, rebut the prima facie proof and establish the accuracy of the facts supporting his assessment. [9]

[22] Recently, the Court of Appeal described the taxpayer’s burden as follows: [26] Le fardeau du contribuable consiste à démontrer « en quoi les faits sur lesquels s’appuie la cotisation sont incorrects. Cettepreuve doit être suffisante pour convaincre le tribunal, à première vue ». Elle doit aussi « comporter un certain degré de précision et deprobabilité en sa faveur » pour être retenue.[10] [23] As to what constitutes prima facie evidence sufficient to rebut the presumption, the Québec Court of Appeal in St-Georges v.Québec (Sous-ministre du Revenu)[11] explains as follows: [10] Dans Capobianco c.

Québec (Sous-ministre du Revenu), 2007 QCCA 1235 , J.E. 2007-1837 aux paragr. 12 à 14(C.A.), la Cour précise que le contribuable n’a pas à établir le montant exact de son revenu imposable. Cet enseignement metdéfinitivement fin au flottement entourant la question du fardeau de preuve du contribuable qui s’oppose à l’avis de cotisation parce quele montant de son revenu imposable établi par le ministère du Revenu serait inexact.

Le contribuable doit seulement démolirl’exactitude de la présomption en présentant une preuve prima facie de son inexactitude. [11] La preuve du contribuable doit toutefois comporter un certain degré de précision et de probabilité en sa faveur par oppositionà des allégations vagues et ambiguës. Règle générale, la simple affirmation du contribuable ne suffit pas; elle aura avantage à êtresoutenue par une preuve documentaire ou circonstancielle. [12] La thèse voulant qu’une simple négation de la part du contribuable puisse contrer la présomption de validité de l’article1014 L.I. reviendrait à priver cet

article de tout son sens. (Footnotes Omitted) [24] In 9027-5967 Québec Inc.[12], the Court of Appeal also explained what constitutes prima facie evidence: [14] Règle générale, la preuve prima facie se définit comme une preuve suffisante pour établir un fait jusqu’à preuve du contraire.Dans Stewart c.

M.R.N., le juge Cain mentionne qu’« une preuve prima facie est celle qui est étayée par des éléments de preuve quicréent un tel degré de probabilité en sa faveur que la cour doit l’accepter si elle y ajoute foi, à moins qu’elle ne soit contredite ou que lecontraire ne soit prouvé ». (Footnotes omitted) [25] The Court of Appeal has also stated that prima facie evidence constitutes “un début de preuve convaincante”.[13] [26] As a general rule, “la simple affirmation du contribuable ne suffit pas; elle aura avantage à être soutenue par une preuvedocumentaire ou circonstancielle”[14]. [27] A taxpayer’s evidence based solely on testimony may, in some circumstances, be sufficient to constitute prima facie proofrebutting the presumption, but only in the following circumstances: [27] Un « témoignage clair, non ébranlé en contre-interrogatoire et offert par un témoin dont la crédibilité n’[a] pas été mise endoute, alors qu’aucune preuve contraire n’[a] été présentée par le fisc » peut constituer une preuve suffisante pour « démolir » laprésomption.

Cependant, la simple négation des faits retenus pour la délivrance de l’avis de cotisation n’est pas suffisante pour contrerla présomption de validité.[15] [28] Finally, as the Court of Appeal recently stated in Alertpay, the presumption of validity of notices of assessment extends tonotices that have been arrived at using an alternative audit method: [31] La présomption de validité des cotisations s’étend aussi à celles qui sont établies par l’utilisation d’une méthode alternative ouindirecte.

Le contribuable pourra donc se décharger de son fardeau en démontrant, prima facie, que la méthode « n’était pas fiable ou queles conditions requises pour y recourir n’ont pas été observées ».[16] 2.2. Has the taxpayer rebutted the presumption of validity of the Underlying Assessments? Specifically, did he adduce prima facieevidence establishing that the Agency erred in using an alternative method to reconstruct the Restaurant’s sales for the 2007 to2011 taxation years and further erred when it relied on unreliable data to reconstruct the sales? [29] 3173798 Canada Inc. was a corporation established in 1995.

It operated a La Belle Province restaurant franchise located at 3945Route 132 in Ville Sainte-Catherine, Québec from 1996 to July 2015. [30] During the period relevant to this appeal, its shareholders and their respective share ownership was as follows: 30.1. Ioannis Vafopoulos (the taxpayer) – 24 % of the shares 30.2. George Kikiris – 24 % of the shares; 30.3. 9155-6415 Québec Inc. –52 % of the shares.[17] [31] From 1996 to 2012, Mr. Vafopoulos was president of 3173798 Canada Inc.

He sold his shares in the Corporation in May 2012. [32] Both George Kikiris and Ioannis Vafopoulos were introduced to the restaurant business by Christos Papagiannis, a member ofthe Papagiannis Group. [33] The Papagiannis Group is comprised of Christos Papagiannis, his brother Achille Papagiannis and their cousin Thomas

Bablekis. [18] [ 34 ] Mr. Papagiannis and Mr.

Bablekis directly or indirectly owned and controlled a number of companies including 9155-6415 Québec Inc., a holding company which also controls Gestion Le Petit Québec Inc. and 9154-2027 Québec Inc. doing business as ABC Management Gestion ABC. [19] [ 35 ] ABC Management and Gestion le Petit Québec Inc. operate as franchisors of the La Belle Province chain of restaurants. [ 36 ] In September 1995, 3173798 Canada Inc. entered into a licensing and franchise agreement with the Papagiannis Group whereby the latter granted 3173798 Canada Inc. a license to operate the Restaurant. [20] [ 37 ] The Restaurant served steamed and toasted hot dogs (the most popular item on the menu), hamburgers, fries, poutines, submarine sandwiches, smoked meat sandwiches, and a few other items. [21] [ 38 ] The Restaurant was operated by Mr.

Vafopoulos and George Kikiris; they performed the functions of managers, cleaners and cooks and did some bookkeeping functions. [ 39 ] Three to four employees worked at the Restaurant; one employee worked at the cash register while Mr. Vafopoulos and his son Podromos or Mr. Kikiris and another employee worked at the grill and preparation station. [ 40 ] Prodromos Vafopoulos is the taxpayer’s son. He worked either part time or full time alongside his father at the Restaurant from 2002 to 2012.

Later in time, he also worked at other La Belle Province restaurants franchises owned or controlled by the Papagiannis Group. He still works as a cook in a La Belle Province Restaurant at the time of the trial. [ 41 ] The Agency used an alternative or indirect audit method to reconstruct the Restaurant’s sales volume for the period 2007 to 2011. The Agency’s methodology relied on the Restaurant’s volume of bread purchases during the relevant timeframe to reconstruct its actual sales. [ 42 ] The parties admit that bread is an essential ingredient of the items sold by the Restaurant.

The Restaurant purchased the following types of bread from Multi-Marques, its exclusive bread supplier: hot-dog buns (both for the toasted and steamed version of the hot dog), hamburger buns, submarine rolls and rye bread for smoked meat sandwiches. [22] [ 43 ] Mario Tardif is a Revenue Québec investigator and auditor. Between November 2011 and June 2012, Mr. Tardif audited the Papagiannis Group and its related companies, including the La Belle Province franchiser, as well as a number of La Belle Province franchisees.

His investigation led him to discover the existence of a scheme within the La Belle Province restaurants which allowed numerous La Belle Province franchisees to under declare and under-report their volumes of sales. [23] [ 44 ] Monique Tardif is an auditor at Revenue Québec. In 2008, she audited 3173798 Canada Inc. for the 2005, 2006 and a portion of the 2007 taxation years (ending October 31, 2007). [24] [ 45 ] Jean-Pierre Payeur is also a Revenue Québec auditor. Between November 2012 and March 2013, he audited 3173798 Canada Inc. for the 2007 to 2012 taxation years. [25] [ 46 ] Mr.

Payeur’s audited relied in part on information gathered by Mario Tardif and Monique Tardif. [ 47 ] Julie Serré is also a Revenue Québec auditor. In 2013, she audited Mr. Ioannis Vafopoulos for the taxation years 2007 to 2011. [26] 2.2.1. Was the Agency justified in relying on an alternative audit method to reconstruct the Restaurant’s sales? [ 48 ] The Minister is not bound by the information provided by a taxpayer in his or her tax return.

The Minister may, notwithstanding the return, make an assessment using an indirect or alternative method to measure taxable income where the appropriate circumstances warrant it. [27] [ 49 ] In Restaurant Le Relais de Saint-Jean Inc . v.

Agence du revenu du Québec , the Court of Appeal held that the Agency may resort to an alternative audit method when 1) it is impossible for its auditor to conduct an audit using the direct and traditional method, and 2) the auditor has reasonable grounds to conclude that the taxpayer’s books, records, registers and supporting documents are deficient and unreliable or that the information contained therein raise a serious doubt as to the accuracy of the information. [28] [ 50 ] The Underlying Assessments are based on an alternative method whereby the Agency reconstructed the sales of the Restaurant based on its volumes of purchases of bread. [ 51 ] The Agency’s auditor, Mr.

Payeur, relied on an alternative method because he concluded that the Restaurant’s sales data and accounting records were deficient and unreliable. Specifically, he discovered: a. In the course of the Agency’s audit of the franchisor [29] , the Agency learned that numerous La Belle Province restaurants controlled by the Papagiannis Group had put in place a double client number system with its bread supplier, Multi-Marques.

Under this scheme, the La Belle Province restaurants would order bread from their supplier using two client numbers, yet the purchases of only one client number would appear on the accounting records of the restaurants. This led to an under-reporting of the sales. When the Agency conducted its audit of the Restaurant, it discovered that it too had two client numbers with Multi-Marques, yet its books initially recorded purchases from only one of the two client numbers. [30]

b. The cash register daily sales records ( Z de caisse ) were not available for the period January 1, 2007, to August 31, 2009. [31] c. Invoices and receipts for the purchase of supplies and other raw materials were similarly not available for a period covered by the audit.

Although he was able to meet the Restaurant’s accountant, many accounting records were still missing including monthly summaries of purchases and sales, and daily cash register receipts. [ 52 ] The fact that the Agency discovered that the Restaurant had two client numbers with its bread supplier, yet its books only disclosed purchases of bread from one of the two client numbers is a significant factor that justified the use of the alternative method. [32] [ 53 ] Moreover, given the Restaurant’s deficient book keeping and incomplete records, the Court concludes that the Agency was justified in using an alternative method to reconstruct its sales. 2.2.2.

Did the Agency err in reconstructing the Restaurant’s sales by relying on an erroneous bread spoilage rate? [ 54 ] The Agency’s audit led it to reconstruct the Restaurant’s sales from 2007 to 2011. It found that the Restaurant under-reported sales of $2,521,544 over that period.

The table below summarizes the Agency’s audit: [33] Years Declared Sales Reconstructed Sales Variance Ratio Variance/Reconstitution 2007 $821,880.17 $1,660,195.54 $838,315.37 102.00% 2008 $820,968.80 $1,658,225.10 $837,256.30 101.98% 2009 $889,508.00 $1,409,700.67 $520,192.67 58.48% 2010 $970,097.00 $1,061,440.68 $91,343.68 9.42% 2011 $1,142,866.00 $1,358,513.11 $215,647.11 18.87% 2012 $784,341.80 $803,130.86 $18,789.06 2.40% Total $5,429,661.77 $7,951,205.96 $2,521,544.19 [ 55 ] Mr. Vafopoulos argues that the Agency’s methodology is skewed and unreliable on two grounds: 55.1.

It relied on a bread spoilage rate of 5 % for steamed hot-dog buns and 3 % for the other bread used at the Restaurant whereas the Agency should have used a bread spoilage rate of at least 15 % [34] ; and 55.2. It relied on bread-purchase data obtained from Multi-Marques, whereas this data is unreliable. Bread Spoilage Rate [ 56 ] The Restaurant sold fast-food items such as hot dogs, hamburgers, submarines, smoked meat sandwiches, French fries and poutines.

Bread is an integral part of its menu items. [ 57 ] The Agency relied on an alternative audit method and reconstructed the Restaurant’s sales based on the amount of bread it purchased. Cognizant that not all of the bread purchased by a restaurant results in sales, notably because of spoilage or free meals dispensed to staff, the Agency determined that a percentage of the Restaurant’s bread purchases should be discounted and not applied towards reconstructed sales volumes.

The higher the bread spoilage percentage, the lower will be the amount of the reconstructed sales. [ 58 ] In the Underlying Assessments, the Agency relied on a bread spoilage rate of 5 % for steamed hot-dog buns (which represent the vast majority of sales) and 3 % for other bread items. [ 59 ] Mr. Payeur used this figure in his reconstruction analysis since these were the figures provided by Mr. Kikiris to the Agency’s auditor (Ms. Tardif) during the 2008 Audit. [ 60 ] Mr.

Vafopoulos claims that the Agency’s reconstruction of sales is not reliable because it overly inflated the sales volumes and income by relying on a bread spoilage rate that is too low. He claims that the true bread spoilage rate at the Restaurant was 15 % for the relevant timeframe. He supports this claim with the expert report and testimony of Julie Faucher. [ 61 ] Ms. Faucher is a professor at the Institut de tourisme et d’hôtellerie du Québec .

She was declared an expert in restaurant management and operations. [ 62 ] In her report [35] , she writes that fast food restaurants such as the one operated by 3173798 Canada Inc. have a bread spoilage rate of between 15 and 25 %: En conclusion, il est évident que de telles opérations commandent l’utilisation de très grandes quantités de pain et inévitablement génère une proportion importante de perte pour cet ingrédient de base. Historiquement, tous types de restauration confondus, le pain, les pertes en pain, sont le talon d’Achille des restaurateurs.

Le client s’attend à du pain frais, les restaurateurs sont soucieux de lui en servir, en tout temps, peu importe l’heure ou le jour de la semaine. À plus forte raison, quand sa réputation en dépend alors que des mets de son menu en sont majoritairement constitués.

Dans l’établissement de La Belle Province de Ville Sainte-Catherine, j’estime que considérant le menu, le roulement et la mise en place, les pertes générales en pain de toute sorte, incluant pain asséché et tranches trop petites, devraient se situer entre 15 et 25 % de tout le pain acheté. [ 63 ] At the trial, she asserts that the minimum bread spoilage rate for fast-food restaurants such as La Belle Province is 20 %. [ 64 ] For the reasons that follow, the Court attaches no weight to her opinion. [ 65 ] The probative value to be assigned to an expert opinion is directly related to the amount and quality of admissible evidence on which it relies. [36]

[ 66 ] In La preuve civile Professor Catherine Piché summarizes this rule as follows: Opinion fondée sur la preuve – Le témoin expert ne se contente pas de dénoncer une opinion purement théorique, scientifique ou abstraite. Son opinion est fondée sur ses connaissances et son expérience, ainsi que sur des faits qu’il a observés ou qui ont été légalement prouvés . [37] (Underlining added) [ 67 ] In R. v.

Abbey , the Supreme Court expressed the rule as follows: While it is not questioned that medical experts are entitled to take into consideration all possible information in forming their opinions, this in no way removes from the party tendering such evidence the obligation of establishing, through properly admissible evidence, the factual basis on which such opinions are based. Before any weight can be given to an expert's opinion, the facts upon which the opinion is based must be found to exist. [38] [ 68 ] In R. v.

Lavallée , the Supreme Court adds that ‘’the more the expert relies on facts not proved in evidence the less weight the jury may attribute to the opinion“. [39] [ 69 ] The probative value of Ms. Faucher’s opinion suffers from a number of deficiencies. Firstly, she never visited the Restaurant that is the subject matter of this appeal. The only La Belle Province franchise that she visited was a different restaurant that opened at 3745 Route 132 and which she visited in September 2018, more than seven years after the facts which gave rise to this litigation. [40] [ 70 ] Moreover, she did not speak to Mr.

Vafopoulos or Mr. Kikiris, both prior to drafting her report nor after. In fact, she states that she ignored who were the persons responsible for the operation of the Restaurant. In addition, she did not analyze the Restaurant’s actual purchase records, nor did she personally witness how bread was consumed or discarded at the Restaurant. [ 71 ] According to Mr. Vafopoulos, steamed hot-dog buns were sometimes left in the steamer for an overly lengthy period and had to be discarded. Similarly, toasted hot-dog buns that were left on the grill for too long were also disposed of.

He adds that opened packages of bread that were not consumed had to be disposed of at the Restaurant’s closing. [ 72 ] However, Mr. Vafopoulos is unable to explain or quantify the weekly quantities of bread purchased by the Restaurant. He adds that except for Tuesdays, he wasn’t present at the Restaurant when the bread was delivered. Similarly, he does not quantity, either in terms of volume or a percentage of purchases, how much bread the Restaurant discarded. [ 73 ] His son Prodromos offered similarly vague and unspecific testimony with respect to bread consumption and spoilage at the Restaurant. [ 74 ] Mr.

Kikiris acknowledged that some of the bread purchased by the Restaurant had to be discarded. However, he adds that few problems were experienced with respect to hot-dog buns. When asked specifically about bread spoilage, he answered ‘’I don’t know how much bread was wasted“. [ 75 ] Overall, the taxpayer’s evidence on bread spoilage is vague, not credible or reliable. The Court was not provided with any business records or registers establishing bread spoilage levels or percentages.

Even if the taxpayer’s evidence was reliable, which it wasn’t, it is impossible for the Court to arrive at a bread spoilage rate. [ 76 ] In short, the lay witness testimony with respect to bread spoilage rate at the Restaurant does not support Ms. Faucher’s opinion because it is too vague, not credible and unreliable. [ 77 ] But more importantly, Ms. Faucher’s expert opinion is directly contradicted by Mr.

Kikiris’s testimony. [ 78 ] In 2007-2008, the Agency audited 3173798 Canada Inc. for the 2005, 2006 tax years and a portion of the 2007 tax year (ending October 31, 2007). [41] Monique Tardif carried out the audit for Revenue Québec (the 2008 Audit). [ 79 ] Ms. Tardif met with Mr. Kikiris in November 2007 to review and discuss the Restaurant’s operations, including the purchase of ingredients and spoilage rates. Ms. Tardif never met Mr. Vafopoulos. [ 80 ] Mr. Kikiris represented to her that the Restaurant’s spoilage rate was 6 %, including for hot-dog buns.

She applied this spoilage rate to her reconstruction analysis and prepared a draft assessment which showed undeclared sales of $476,431 for 2005 to October 2007. [42] [ 81 ] In May and in July 2008, she met with Mr. Kikiris and the Restaurant’s accountant to review her draft assessment. According to Ms. Tardif, Mr. Kikiris reviewed the sales data and stated that her reconstruction of sales was inaccurate because the bread spoilage rate she used was too high - she should have applied a bread spoilage rate of 3 % to 4 %, not 6 % or 8 %. [ 82 ] Mr. Kikiris does not deny having stated this to Ms. Tardif. [ 83 ] Ms.

Tardif’s testimony on this subject was clear, convincing and credible. It is also reliable since her 2008 Audit Report corroborates her testimony. [43] [ 84 ] The notices of reassessment for the 2006, 2006 and 2007 tax years issued by the Agency following the 2008 Audit were not contested by 3173798 Canada Inc. and the taxes owed were paid. [ 85 ] To conclude, the Court places no weight on the opinion expressed by Ms. Faucher because her opinion is mere speculation, is

not supported by the evidence, and in fact, is contradicted by the evidence. [ 86 ] The unrefuted evidence establishes that the true bread spoilage rate at the Restaurant was in the vicinity of 4 %, not the speculative rate of 15 to 25 % proffered by Ms.

Faucher. [ 87 ] The Agency’s use of a bread spoilage rate of 5 % for steamed hot dog buns and 3 % for other bread products [44] in the Underlying Assessments was correct and supported by the evidence. [ 88 ] The taxpayer has not provided prima facie proof which rebuts the presumption of validity of the bread spoilage rate relied on by the Agency to reconstruct the Restaurant’s sales. 2.2.3.

Unreliable Multi-Marques Data [ 89 ] The taxpayer argued that the information provided to the Agency by Multi-Marques and which was used to reconstruct the Restaurant’s sales is suspect and questionable and has little probative value given the existence of a ‘’wide spread price fixing/kickback scandal“ which was of common notoriety in the bread industry. [45] [ 90 ] The taxpayer did not adduce any legally admissible evidence with respect to the existence of this alleged price fixing scheme. Accordingly, his argument pertaining to the unreliable Multi-Marques data is not supported by any evidence. 2.2.4.

Conclusions on the Underlying Assessments [ 91 ] The methodology followed by Mr. Payeur to reconstruct the undeclared sales of the Restaurant was a meticulous process.

He relied notably on the data obtained from the Sales Recording Module ( module d’enregistrement des ventes or MEV) which was installed at the Restaurant on October 28, 2011 [46] , and he obtained from Multi-Marques the purchases of bread for the Restaurant’s two client numbers. [47] [ 92 ] Based on the amount of bread purchased obtained from a third party (Multi-Marques), he reconstructed the sales of hot dogs, hamburgers and other menu items based on the sales ratio data that he obtained from the SRM.

He also used the consumer price index issued by Statistics Canada to readjust the prices during the relevant time frame. Finally, he used the bread spoilage rates that had been provided to Mrs. Tardif when she conducted the 2008 audit. [48] [ 93 ] The result of this reconstruction analysis was not shaken or called into question by the taxpayer’s evidence. The Underlying Assessments are valid and reliable. 2.3. Has the taxpayer rebutted the presumption of validity of the Notices of Assessment?

Specifically, did he adduce prima facie proof demonstrating that the Minister erred in concluding that he received a benefit from 3173798 Canada Inc.? [ 94 ] Based on the Underlying Assessments, the Agency imputed 24 % of the undeclared sales of the Restaurant for the time period 2007 to 2011 to Mr. Vafopoulos’s personal income for each of those years pursuant to

section 111 Taxation Act . [ 95 ] Mr. Vafopoulos denies en bloc the Minister’s claim that he received a benefit from the Corporation. Despite the fact that he owned 24 % of the shares of 317398 Canada Inc., he claims he that was a mere puppet or straw man and that he received no benefits whatsoever from the Corporation, other than a salary. [ 96 ] He adds that the Papagiannis Group exercised de facto control over all aspects of the corporation and reaped 100 % of the financial rewards tied with share ownership. Therefore, the reassessments are wrong insofar as the Minister should not have applied

section 111 Taxation Act and should not have attributed to him the undeclared income of the corporation for the taxation years 2007 to 2011. [ 97 ]

Section 111 of the Taxation Act provides: 111. Where, at any time in a taxation year, a benefit is conferred by a corporation on a shareholder, or on a person in contemplation of his becoming a shareholder, the amount or value thereof shall be included in computing the income of the shareholder or the person, as the case may be, for the year. 111.

Lorsque, à un moment quelconque d'une année d'imposition, un avantage est accordé par une société à un actionnaire ou à une personne en vue qu'elle le devienne, le montant ou la valeur de cet avantage doit être inclus dans le calcul du revenu de l'actionnaire ou de la personne, selon le cas, pour l'année. [ 98 ] Section 15(1) of the Income Tax Act [49] in force at the relevant time period is substantially the same as

section 111 Taxation Act and provides:

(1) Where at any time in a taxation year a benefit is conferred on a shareholder, or on a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by (…) the amount or value thereof shall, except to the extent that it is deemed by

section 84 to be a dividend, be included in computing the income of the shareholder for the year. 15

(1) La valeur de l’avantage qu’une société confère, à un moment donné d’une année d’imposition, à un actionnaire ou à une personne en passe de le devenir est incluse dans le calcul du revenu de l’actionnaire pour l’année — sauf dans la mesure où cette valeur est réputée par l’article 84 constituer un dividende — si cet avantage est conféré autrement que :… [ 99 ] Because of the similarity in the federal and provincial legislation, case law interpreting the federal provision offers useful guidance with respect to the scope of

section 111 Taxation Act . [ 100 ] In Laliberté v. Canada , the Federal Court of Appeal provides the following framework for determining whether a benefit has been conferred under subsection 15(1) Income Tax Act : involves three steps: 1) determining whether a benefit has been conferred on the shareholder qua shareholder; 2) determining what precisely the benefit is; and 3) determining the value of that benefit to the shareholder by asking what the shareholder would have had to pay for it had he or she not been a shareholder. [50] [ 101 ] The Court will apply this framework to determine whether a benefit has been conferred on Mr. Vafopoulos within the meaning of

section 111 Taxation Act . 2.3.1 Was a benefit conferred on Mr. Vafopoulos because of his status as a shareholder of 3173798 Canada inc.? [ 102 ] Whether or not Mr. Vafopoulos received a benefit from 3173798 Canada Inc. within the meaning of

section 111 Taxation Act during the relevant period because of his status as a shareholder is essentially a factual issue. [ 103 ] Mr. Vafopoulos claims he received no benefit from 2007 to 2011 despite his share ownership.

He adds that he was simply a manager and cook at the Restaurant and drew a weekly salary. [ 104 ] His lack of credibility and reliability, especially borne out by his cross-examination, significantly undermines his claim and leads the Court to conclude that he has not made prima facie case rebutting the presumption of validity which attaches to the facts on which rest the Minister’s decision to attribute to him the undeclared income of the Restaurant. [ 105 ] One of the purposes of any trial is to seek and to ascertain the truth. [51] This task is made more difficult when one or more of the parties and their witnesses hinder this goal.

The trial in this matter lasted five days. The Court believes that the taxpayer and the witnesses he called have painted an incomplete picture of the operations of 3173798 Canada Inc. [ 106 ] The taxpayer and his witnesses consistently answered ‘’I don’t remember” or ‘’I don’t know” when such answers were not plausible given the documentary evidence or the context of this case. [ 107 ] The taxpayer and his witnesses’ memory was selective.

When the facts supported their respective positions, the witnesses had a good recollection of the facts. [ 108 ] When the facts favoured the Agency’s position or was detrimental to their business interests, their memory failed. Only when confronted in cross-examination with documents, were they forced to admit facts which they omitted to disclose in their examination in chief. [ 109 ] For these reasons and for those explained in greater detail below, the Court concludes that taxpayer and his witnesses are not credible or reliable. [ 110 ] Mr. Vafopoulos was born in Greece and immigrated to Canada in 1970.

He had little formal education and claims that he has difficulty understanding documents written in French or English. His son Prodromos would regularly translate business documents or any notices received from the Agency for him. He testified through a translator. [ 111 ] He has worked in restaurants since arriving to Canada. [ 112 ] In the mid-1990s, Christos Papagiannis asks Mr. Vafopoulos and Mr. Kikiris to become shareholders of 3173798 Canada Inc., which will operate a La Belle Province franchise restaurant on Route 132 on the South Shore of Montreal.

He agrees. [ 113 ] In October 1995, 3173798 Canada Inc. and the Papagiannis Group enter into an agreement whereby the Corporation is granted a licence to operate the Restaurant. [52] The Restaurant opens shortly thereafter. [ 114 ] The Restaurant is open seven days a week, 363 days of the year, from 11:00AM to 1:00AM. He works six days a week from 4:00 PM to closing, except on Tuesdays when he worked double shifts (9:00 AM to 1:00 AM). [ 115 ] George Kikiris also worked five to six days a week, during the morning shifts, from 9 AM to 1 PM. [ 116 ] According to Mr.

Vafopoulos, the only financial benefit he received from the Corporation consisted of a weekly paycheck. He never received any other funds from the company and ignores who received the income from the Restaurant’s undeclared sales. [ 117 ] When shown documents relating to the 3173798 Canada Inc. (financial statements, excerpts from the Registraire des entreprises

du Québec ), Mr. Vafopoulos feigns ignorance. [ 118 ] When questioned about the Corporation’s activities, he regularly answers ‘’I don’t know“ or “I don’t remember” or shifts the responsibility to Christos Papagiannis. These answers are not credible or reliable. [ 119 ] He claims that Christos Papagiannis ran 3173798 Canada Inc. and that he was a simple employee; his responsibilities were limited to cleaning the Restaurant and acting as a cook. When the Restaurant closed at the end of the day, Mr.

Vafopoulos would print from the cash register the daily sales total and store the printout in the safe located in the Restaurant’s office. [ 120 ] In short, his testimony in chief amounts to a blanket denial of the Agency’s claims. He paints a portrait of a taxpayer who is merely an employee of the Restaurant and who only drew a salary and received no other benefits. [ 121 ] The Court believes that Mr.

Vafopoulos played a greater role in the operation of the Corporation that he lets on and that in fact, he did receive a benefit from the company. [ 122 ] As his cross-examination reveals, his testimony is unreliable, lacks credibility and does not constitute prima facie proof of the lack of benefit. His answers repeatedly contradict statements he made in chief. [ 123 ] In 1996, Mr. Vafopoulos paid $35,000 to the Papagiannis Group to acquire 24% of the shares of 3173798 Canada Inc. Mr.

Kikiris invested a similar amount. [ 124 ] In his examination in chief, he claims that the only remuneration he received from the Corporation was a weekly salary of $500. This is not plausible given that he worked more than 60 hours a week. [ 125 ] In cross-examination, he admits that he and Mr. Kikiris also received a monthly “bonus” of $1,000 in addition to his salary. [ 126 ] Initially, he states that his total annual remuneration, including the salary and the “bonus”, was to $38,000. [53] [ 127 ] Yet, in his 2008 income tax return, he declares income from employment of $58,578.

He is unable to explain the discrepancy between this amount and the alleged total remuneration of $38,000. [54] [ 128 ] He offered similarly vague and contradicting testimony when confronted with his tax returns for the years 2009, 2010 and 2011. [ 129 ] The Court finds that Mr. Vafopoulos not only avoided to mention that he received a “bonus” from the Corporation, but that he minimizes both the size and the nature of the bonus [ 130 ] Mr.

Christos Papagiannis stated that 3173798 Canada Inc.’s shareholders had a written agreement which provided for the distribution of the profits of the Corporation in proportion to their share ownership. This agreement was never produced by the taxpayer, although he and his son were asked to produce it by counsel for the Agency. Apparently, the document could not be found. [ 131 ] Mr.

Papagiannis adds the bonus paid out by the Corporation during 2007-2011 represented each shareholder’s share of the profits. [ 132 ] The Court finds that the ‘’bonus“ was for all intents and purposes a corporate dividend. [ 133 ] The “bonuses” paid by 3173798 Canada Inc. to Mr. Vafopoulos were not declared by him in his annual tax returns filed from 2007 to 2011. [ 134 ] Mr. Vafopoulos’s testimony with respect to funds received upon the disposal of his shares in the Corporation in 2012 is also indicative of his lack of credibility and the role he played in the company. [ 135 ] Mr.

Vafopoulos was very hesitant when he was asked whether he ever received funds over and above the ‘’bonus and weekly salary“. He was asked the question a number of times but would not answer the question until the Court directed him to do so. [ 136 ] He finally admits that in 2012 he agreed to sell his shares in 3173798 Canada Inc. to the Papagiannis Group for $100,000. [ 137 ] However, this answer was also misleading since his son Podromos and Mr.

Papagiannis both testified that the sale price was $200,000 made up of a onetime payment of $100,000 in 2012 and a balance of sale of $100,000 payable by the Papagiannis Group by way of monthly payments of $1,500. [ 138 ] The gain realized on the sale of the shares was never declared to Revenu Québec. [ 139 ] Mr. Vafopoulos’s straw man or puppet theory is further undermined by the following: 139.1.

The taxpayer’s conduct in the period subsequent to receiving the Notices of Assessment: Notwithstanding the fact that he was allegedly left holding the bag with a significant tax debt, there is no evidence that he complained of this debt to the Papagiannis Group or asked the Group to indemnify him given that he was a mere puppet and had received no benefit from his status as a shareholder; 139.2. Likewise, Mr. Vafopoulos and his son kept working in franchises controlled by the Papagiannis Group from 2013 to 2017; 139.3.

In March 2013, after the notices of assessment were issued to 3173798 Canada Inc. and its shareholders, the Papagiannis Group stopped paying to Mr. Vafopoulos the balance of sale of $100,000 owed on the sale of his shares. Surprisingly, Mr. Vafopoulos never complained once to the Papagiannis Group about this non-payment. No demand letter is sent to the Papagiannis Group, no lawsuit

is filed seeking the full payment of the balance of the price. [ 140 ] As the courts have previously stated, the purpose of a

section 111 Taxation Act or subsection 15(1) Income Tax Act is “to sweep in payments, distributions, benefits and advantages that flow from a corporation to a shareholder by some route other than the dividend route and that might be expected to reach the shareholder by the more orthodox dividend route if the corporation and the shareholder were dealing at arm's length.” [55] [ 141 ] Put another way, the aim of shareholder benefit rules is “to prevent corporations from using an indirect means of conferring an untaxed benefit on its shareholders.” [56] [ 142 ] In the seminal Pillsbury Canada Ltd. v. Minister of National Revenue case, Cattanach, J. wrote in reference to

section 8 Income Tax Act , the predecessor to subsection 15(1) : 19. Paragraph (

c) of subsection (1) of

Section 8 may be expected, therefore, to apply to cases where benefits or advantages have been conferred on a shareholder in such circumstances that the effect is, in substance, equivalent to the payment of a dividend to the shareholder. [57] [ 143 ] Professor Krishna writes that shareholder benefits rules are intended to tax the following: Subsection 15(1) targets distributions of corporate wealth that are disguised to circumvent the rules in respect of the taxation of dividends while the corporation is a going concern. [58] [ 144 ] In Alertpay Incorporated v.

Agence du revenu du Québec the Court of Appeal confirmed a Court of Québec ruling that dismissed Mr. Patel’s appeal of a notice of assessment which held that as a shareholder, he had appropriated funds from Alertpay Inc.: [48] La conclusion que M. Patel s’est approprié les fonds d’Alertpay repose sur les déterminations factuelles suivantes : (1) pour les années en litige, Alertpay a généré des revenus qui n’ont pas été déclarés; (2) ces revenus ne figurent pas aux états financiers d’Alertpay et aucune explication raisonnable n’a été fournie; et

(3) M. Patel est actionnaire et administrateur unique d’Alertpay et a le plein contrôle de cette société. [49] Ces éléments étaient suffisants pour conclure que M. Patel s’est approprié les fonds d’Alertpay. Il pouvait donc être cotisé par l’ARQ en conséquence. [ 145 ] In Sotiropoulos v. Agence du revenu du Québec [59] , the individual taxpayer, like Mr. Vafopoulos in the present case, argued that he was a passive investor and never received any benefits from the corporation.

Justice Fournier rejected this argument: [112] Sotiropoulos affirme ne pas s’être approprié, de quelque façon que ce soit, de fonds de la Société au cours de la Période pertinente. [113] Pour preuve, il dit n’être qu’un investisseur passif dont l’entière responsabilité de la gestion incombait à Tasso durant la Période pertinente. [114] Le Tribunal accorde peu de crédibilité au témoignage de Sotiropoulos alors qu’il feint avoir peu ou pas d’intérêt dans la Société. … [140] Sotiropoulos a répété à quelques reprises qu’il ne s’est approprié aucune somme d’argent de la Société durant la Période pertinente. [141] Cette simple affirmation n’est cependant pas suffisante. [142] À l’instar de l’arrêt Pangakis c.

ARQ , l’absence de toute explication quant aux écarts relevés par l’ARQ et quant au sort réservé à l’argent provenant des ventes non déclarées, jumelée au témoignage jugé peu crédible de Sotiropoulos, permettent de conclure que celui-ci ne s’est pas déchargé de son fardeau initial permettant de réfuter la présomption de l’appropriation des fonds pour les années d’imposition 2010 et 2011. [ 146 ] As in the Sotiropoulos case, Mr. Vafopoulos makes a blanket denial with respect to receiving any benefits from the Corporation. His denial is not credible.

Moreover, he fails to explain how and to whom the Corporation’s undeclared income was distributed. [ 147 ] Mr. Vafopoulos has not raised a prima facie case refuting the facts on which the Minister relied on to decide that he received a benefit pursuant to

section 111 Taxation Act in connection with the undeclared income of the Corporation. The Minster was justified in reaching this conclusion given the following: 147.1. Mr. Vafopoulos owns 24% of the shares of 3173798 Canada inc; 147.2. He operated the Restaurant along with Mr. Kikiris; 147.3. Between 2007 and 2012, the Restaurant operated by 3173798 Canada Inc. realized significant income which it did not declare to the tax authority; 147.4.

The shareholders of the Corporation agreed to split the Restaurant’s profits based on their share ownership percentage and to redistribute this profit on a regular basis in the form of a “bonus”, which was in every practical sense a corporate dividend, which they did not report as income in their annual tax filings; 147.5. In 2012, he sold his shares in 3173798 Canada Inc. for $200,000, and received at least $100,000 before the purchaser stopped

paying the balance of sale price, yet this income was not disclosed. 147.6. He did not provide a plausible explanation as to what happened to the undeclared income of the Restaurant. His lack of credibility and the evidence offered by other shareholders establishes that this income was redistributed to the shareholders in the form of a bonus which was in effect a dividend; [ 148 ] Finally, Mr. Vafopoulos spent considerable time arguing that while he held 24 % of the shares of the Corporation, de facto control over the company rested with the Papagiannis Group and therefore

section 111 Taxation Act could not apply to him. [60] [ 149 ]

Section 111 makes no reference to control. All that is required for this provision to apply, subject to proving the other requirements of the section, is proof that the taxpayer is a shareholder. [61] 2.3.2. What precisely was the benefit conferred on Mr. Vafopoulos? [ 150 ] The taxpayer did not strongly contest this aspect. His principal argument was that he received no benefit at all despite his share ownership. [ 151 ] The Agency does not have the burden of proving how and when a taxpayer illegally obtained funds from a company of which he is a shareholder and officer to conclude that there has been a shareholder benefit and thus

section 111 of the Taxation Act is triggered. [62] [ 152 ] The Court concludes that the benefit received by Mr. Vafopoulos corresponded to corporate property in the form of regular “bonus” payments in addition to the capital gain realized on the sale of his shares. 2.3.3. What is the value of the benefit conferred on Mr. Vafopoulos? [ 153 ] The taxpayer argues that the Agency acted in an arbitrary manner when it allocated 24 % of the undeclared sales of the Restaurant over the relevant period. [ 154 ] Mr.

Vafopoulos did not prove prima facie , that the Minister’s allocation based on each of 3173798 Canada Inc. shareholders’ percentage of share ownership is factually incorrect. [ 155 ] In fact, the evidence reveals that when the Corporation was formed, the shareholders agreed to split the Restaurant’s future profits based on their respective share ownership.

The Minister’s decision to allocate the Corporation’s undeclared income on a pro rata basis based on share ownership is consistent with this approach. [ 156 ] The courts have recognized that allocating to shareholders undeclared corporate profits based on the percentage of shares owned is reasonable absent credible and plausible evidence adduced by the taxpayer. [63] [ 157 ] For all these reasons, the Court concludes that a benefit was conferred on Mr. Vafopoulos in his capacity as a shareholder of 3173798 Canada Inc. in the form of regular payments of dividends from the Corporation during the relevant period.

He likewise has not made out a prima facie case which is sufficient to set aside the Minister’s Agency’s calculation that this benefit corresponds to his share (24 %) of the corporation’s undeclared income, as established by the reconstruction of the Restaurant’s sales, from 2007 to 2011. 2.4. Are the notices of assessments for the 2007 and 2008 taxation years prescribed? [ 158 ] The Agency argues that the Minister was justified in reassessing Mr.

Vafopoulos for the 2007 and 2008 taxation years notwithstanding the three years prescription period because he negligently or wilfully made misrepresentations in filing his tax returns for those years. [ 159 ] The Minister’s right to make reassessments “at any time”, and thus beyond the normal three year prescription period, is set out in section 1010(2) (b)ii Taxation Act : 1010.

(1) The Minister may at any time determine the tax, interest and penalties payable under this Part, or give notice in writing to any taxpayer who filed a fiscal return for a taxation year that no tax is payable for that taxation year.

(2) The Minister may also redetermine the tax, interest and penalties payable under this Part and make a reassessment or an additional assessment, as the case may be, (

b) at any time, if the taxpayer or the person who filed the return, i. has made a misrepresentation that is attributable to negligence or wilful default or has committed any fraud in filing the return or in supplying any information provided for in this Part, or… (Underlining added) [ 160 ] The Minister bears the burden of proving the facts which constitute a misrepresentation. [ 161 ] A misrepresentation constitutes a misrepresentation for the purposes of section 1010(2) (b)ii Taxation Act even in the absence of fraudulent or malicious intent.

All that is required is for the representation to be inexact. [ 162 ] The Agency’s burden is to prove the taxpayer’s objective fault. A negligent misrepresentation is one that results from lack of objective diligence. [64] [ 163 ] While the misrepresentation must be evaluated at the time of the filing of the tax return, the taxpayer’s subsequent conduct,

including during the audit process, may be considered by the Court to evaluate whether the taxpayer objectively acted with negligence when the return was filed. [65] [ 164 ] Misrepresentation by neglect or lack of diligence, recklessness, disorganisation, or carelessness is sufficient for the purposes of section 1010(2) (b)ii. [66] [ 165 ] In Lacroix v.

The Queen , the Federal Court of Appeal was called upon to interpret the scope of sections 152(4) and 163(2) of the federal Income Tax Act , the sections of the federal statute corresponding to sections 1010 and 1049 Taxation Act , in the context of an assessment based on an alternative method of taxation. The Court described as follows the tax authority’s burden of proof: [30] The facts in evidence in this case are such that the taxpayer’s tax return made a misrepresentation of facts, and the only explanation offered by the taxpayer was found not to be credible.

Clearly, there must be some other explanation for this income. It must therefore be concluded that the taxpayer had an unreported source of income, was aware of this source and refused to disclose it, since the explanations he gave were found not to be credible. In my view, given such circumstances, one must come to the inevitable conclusion that the false tax return was filed knowingly, or under circumstances amounting to gross negligence. This justifies not only a penalty, but also a reassessment beyond the statutory period . …. [32] What, then, of the burden of proof on the Minister?

How does he discharge this burden? There may be circumstances where the Minister would be able to show direct evidence of the taxpayer’s state of mind at the time the tax return was filed. However, in the vast majority of cases, the Minister will be limited to undermining the taxpayer’s credibility by either adducing evidence or cross- examining the taxpayer.

Insofar as the Tax Court of Canada is satisfied that the taxpayer earned unreported income and did not provide a credible explanation for the discrepancy between his or her reported income and his or her net worth, the Minister has discharged the burden of proof on him within the meaning of subparagraph 152(4) ( a )(

i) and subsection 162(3). (Underlining added) [ 166 ] In the instant case, the Court considers that Mr.

Vafopoulos made misrepresentations attributable to negligence or willful default considering the following factors: He earned unreported income, failed to report it over a five-year period and did not provide a credible explanation for the discrepancy between his reported income and the revised income as calculated by the Agency; The repetitive character of the misrepresentations; The importance of the misrepresentations: as per the table reproduced in paragraph 11 of these reasons for judgment, the non- declared taxable income varies between 54 % and 436 % of the reported income during the period 2007 to 2011 (it was 291 % in 2007 and 436 % in 2008); The taxpayer’s poor credibility and record keeping. [ 167 ] The Court concludes that the 2007 and 2008 taxation years are not prescribed. 2.5.

Was the Minister justified in levying the penalties for gross negligence prescribed by

section 1049 of the Taxation Act ? [ 168 ] The Minister imposed penalties totalling $72,362.53 to Mr. Vafopoulos, as the table below illustrates: Year Penalty under

section 1049 T.A. [67] 2007 $20,700.13 2008 $26,486.98 2009 $16,289.80 2010 $2,533.05 2011 $6,352.57 Total: $72,362.53 [ 169 ] The Agency argues that the Minister was justified in levying these penalties because Mr. Vafopoulos’s conduct rose to that of gross negligence considering the importance and the repetitive nature of the Restaurant’s undeclared income. [ 170 ] The Minister’s right to impose a penalty is governed by

section 1049 Taxation Act : 1049. Every person who, knowingly or under circumstances amounting to gross negligence, has made or has participated in or acquiesced in the making of, a false statement or omission in a return, certificate, statement or answer, in this

section referred to as a “return”, made or filed in respect of a taxation year for the purposes of this Act, incurs a penalty equal to the greater of $100 and 50% of the amount by which…. [ 171 ] According to

section 1050 Taxation Act , the Minister has the burden of proving that the taxpayer was grossly negligent. [ 172 ] In St-Georges [68] , the Québec Court of Appeal lists the criteria that a court must look at to determine if the taxpayer has been grossly negligent: [19] Les critères appliqués par les tribunaux afin de déterminer si le contribuable a fait preuve de « négligence flagrante » au sens de l'

article 1049 L.I. sont connus : • l'importance des sommes omises, la valeur des justifications fournies par le contribuable et les circonstances dans lesquelles l'omission est survenue;

• la qualité des registres comptables tenus par le contribuable; • l'éducation, les connaissances et l'expérience en affaires du contribuable; • le fait que le contribuable ait reconnu ou déclaré volontairement les omissions, ou les faussetés, affectant les déclarations litigieuses; • la nature des relations antérieures entre le contribuable et le fisc; • la crédibilité du contribuable. [ 173 ] The Court considers that Mr. Vafopoulos was grossly negligent for the reasons outlined in paragraphs 165 and 166 of these reasons for judgment. The Minister was justified in levying the penalties he did. 3.

Conclusion [ 174 ] Mr. Vafopoulos has not proven prima facie that the facts on which rest the Underlying Assessments and the Notices of Assessment are incorrect. [ 175 ] The 2007 and 2008 tax years are not prescribed. [ 176 ] Finally, the Minister was justified in levying the penalties for gross negligence. FOR THESE REASONS, THE COURT: [ 177 ] DISMISSES Ioannis Vafopoulos’s Introductory Application to Appeal Income Tax Assessments; [ 178 ] WITH LEGAL COSTS owed to the Agence du Revenu du Québec. __________________________________ ENRICO FORLINI, J.C.Q.

Me Philip Aspler Aspler & Associés Plaintiff’s counsel Me Normand Perreault Me Julie Dilli Larivière Meunier Defendant’s counsels Dates of hearing: December 9, 10, 11, 12 and 13, 2019