GUYLAINE DUCHAINE, Appellant, v. HER MAJESTY THE QUEEN,, 2003 TCC 159

Docket: 1999-2659(IT)G BETWEEN: GUYLAINE DUCHAINE, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeal heard on common evidence with the appeals of 9021-0667 Québec Inc. (1999-2662(IT)

G) and Robin Huet (1999-2924(IT)

G) on May 30 and 31, 2002, at Matane, Quebec Before: The Honourable Judge François Angers Appearances : For the Appellant: The Appellant herself Counsel for the Respondent: Bruno Levasseur ____________________________________________________________________ JUDGMENT The appeal from the assessment made under the Income Tax Act with respect to the 1996 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 24th day of March 2003.

"François Angers" J.T.C.C. Translation certified true on this 7 th day of May 2004. Sophie Debbané, Revisor Docket: 1999-2662(IT)G BETWEEN: 9021-0667 QUÉBEC INC., Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeals heard on common evidence with the appeals of Guylaine Duchaine (1999-2659(IT)

G) and Robin Huet (1999-2924(IT)

G) on May 30 and 31, 2002, at Matane, Quebec Before: The Honourable Judge François Angers Appearances: Agent for the Appellant: Guylaine Duchaine Counsel for the Respondent: Bruno Levasseur ____________________________________________________________________ JUDGMENT

The appeals from the assessments made under the Income Tax Act with respect to the taxation years ending on December 31, 1995; May 31, 1996; and December 31, 1996 are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 24th day of March 2003. "François Angers" J.T.C.C. Translation certified true on this 7 th day of May 2004.

Sophie Debbané, Revisor Docket: 1999-2924(IT)G BETWEEN: ROBIN HUET, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] ____________________________________________________________________ Appeals heard on common evidence with the appeals of Guylaine Duchaine (1999-2659(IT)

G) and 9021-0667 Québec Inc. (1999- 2662(IT)

G) on May 30 and 31, 2002, at Matane, Québec Before: The Honourable Judge François Angers Appearances: For the Appellant: The Appellant himself Counsel for the Respondent: Bruno Levasseur ____________________________________________________________________ JUDGMENT The appeals from the assessments made under the Income Tax Act with respect to the 1995 and 1996 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 24th day of March 2003. "François Angers" J.T.C.C. Translation certified true on this 7 th day of May 2004. Sophie Debbané, Revisor Citation: 2003TCC159 Date: 20030324 Docket: 1999-2659(IT)G 1999-2662(IT)G 1999-2924(IT)G BETWEEN:

GUYLAINE DUCHAINE, 9021-0667 QUÉBEC INC., ROBIN HUET, Appellants, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Angers, J.T.C.C. [ 1 ] These appeals were heard on common evidence. The appeals of the appellant company 9021-0667 Québec Inc. (hereinafter "9021") concern the taxation years ending on December 31, 1995; May 31, 1996; and December 31, 1996.

In the case of the appellant Robin Huet, the appeals concern the 1995 and 1996 taxation years, while in the case of the appellant Guylaine Duchaine, the appeal concerns the 1996 taxation year. [ 2 ] The appellant 9021 was incorporated on May 26, 1995, and began to be operated on June 1 of that year. Its main activities are the purchase and sale of used cars as well as the sale of metal for recycling (scrap metal).

The business was operated from June 1, 1995, to May 31, 1996, under the trade name of "Pièces d'autos Robin Huet enr." and from June 1, 1996, to December 31, 1996, under the trade name of "Autos R.G.R. enr." The appellant Robin Huet was the sole shareholder of 9021 from its incorporation until May 31, 1996. He transferred all his shares to his spouse, the appellant Guylaine Duchaine, on June 1, 1996. [ 3 ] During the period from September 1997 to June 1998, the appellant 9021, was subject to an audit of its operations by the organization that was called Revenue Canada at the time.

Once the audit was completed, reassessments were made in respect of the appellant 9021 to include income deemed not to have been reported by 9021 for each of the financial years at issue. For the financial year from June 1 to December 31, 1995, the amount of $73,362 was included; for the financial year from January 1 to May 31, 1996, the amount was $22,337 and for the financial year from June 1 to December 31, 1996, the amount was $39,924. It must be noted that these amounts were the ones that served to calculate the penalties that were assessed on the appellant 9021.

Furthermore, in the Notice of Reassessment, 9021 was informed that the previously allowed carryback of the non-capital loss of $22,280 from the taxation year ending on December 31, 1996, was now disallowed. A subsequent reassessment made on March 10, 1999, resulted in further increasing the income of the appellant 9021 by $20,350 for the financial year ending on December 31, 1996, on the grounds that the net profit had been understated.

The appellant 9021 is accordingly appealing from these assessments. [ 4 ] Concerning the case of the appellant Robin Huet, the Minister of National Revenue (the "Minister") found him at fault for failing to report the amount of $15,990 in his 1995 income for the period from January 1 to May 31, 1995, essentially, the period prior to the incorporation of 9021. The amount of $15,990 was derived from the following three sources: $14,035 accounted for as loan repayments and $1,027 and $928 from unreported sales.

For the period from the incorporation of 9021 to the end of December 1995, the Minister attributed an amount of $73,362 to the appellant as a shareholder benefit under the provisions of subsection 15(1) of the Income Tax Act (the " Act" ). This amount reflects the amount that 9021 did not report as income for the financial year ending on December 31,1995. [ 5 ] For 1996, the Minister included the amount of $22,337 in the appellant's income. This amount was attributed to the appellant as a shareholder benefit pursuant to the provisions of subsection 15(1) of the Act .

A part of this amount, namely, $12,337, reflects the amount that 9021 did not report as income for the financial year ending on May 31, 1996, and the remaining $10,000 reflects an adjusting entry to reduce the amount of sales by the creation of a liability that did not appear on the opening balance of the appellant 9021 for the following financial year.

Penalties based on these amounts were also imposed for the two years. [ 6 ] The appeal of the appellant Guylaine Duchaine deals with the assessments of August 21, 1998, and March 22, 1999, for the 1996 taxation year, in which a total amount of $59,017 was included in her income as a shareholder benefit pursuant to the provisions of subsection 15(1) of the Act and in which a penalty of $4,419 was assessed on the basis of the amount of $39,924. [ 7 ] At trial, the amounts determined in the assessments relating to the appellants were itemized as to their source by the auditor, David Cavanagh Morin.

After familiarizing himself with the operations of the business, he prepared a reconciliation of the income of the business according to its worksheets (Exhibits A-3 to A-5) in order to compare that income with the income recorded in the financial statements and set out in the tax returns of the appellant 9021 for the three financial years at issue. [ 8 ] This exercise enabled the auditor to determine the source of the business' income and to ensure that the worksheets of the appellant 9021 and the adjustments made by the accountant of 9021 were consistent with the financial statements that were used to prepare the tax returns.

Once this work was completed, the auditor was satisfied that everything that was on the worksheets of 9021 had been reported in its income for the three financial years. [ 9 ] Mr. Cavanagh noted from this exercise, however, that very few sales of metal had been entered on the worksheets.

In view of the type of activities carried on by the business, namely, the sale of metals, recycling and the sale of compacted automobiles, and inasmuch as it received monetary advances from the buyers, he therefore sought confirmation of all of the purchases made by certain customers of the appellant 9021, including the company SNF Inc., owner of Marila Métal and Métaux Bastille. Through the two above-named firms, SNF Inc. made monetary advances to the appellant 9021 to enable it to purchase old cars and other scrap metal.

Subsequently, it would buy the old iron from 9021 and in so doing was reimbursed for its loans since 9021 credited the company for the advances that it had received from it. The auditor, Mr. Cavanagh, accordingly took a close look at the monetary advances made to the appellant by Marila

Métal and the manner in which the repayment of the loans was entered on the worksheets and the adjusting entries, such as those in Exhibit A-3. Repayment was made by the sale of the metal. On the basis of this information, Mr. Cavanagh produced in evidence the table found at Tab 14 of Exhibit I-1, from which he concluded that the appellant 9021 made sales of metal that it did not record as sales. These sales amounted to $42,332 for the financial year ending on December 31, 1995; $11,479 for the financial year ending on May 31, 1995; and $12,766 for the year ending on December 31, 1996.

As a matter of fact, according to the witness, these sales were not recorded anywhere since they did not appear on the appellant company's worksheets, and the accountant, when he adjusted the balance owing in relation to the advances, did so by recording a disbursement instead of a credit sale. In this way, according to Mr.

Cavanagh, the sales were not reported and the disbursements were not real because the repayment had been made with the metal that the appellant 9021 had sold. [ 10 ] He subsequently compared the unreported income, according to his table at Tab 14 of Exhibit I-1, with the confirmation of the purchases made by the two metal firms of SNF Inc., which is reproduced at Tab 16 of Exhibit I-1.

The amounts of the purchases by Marila Métal and Métaux Bastille from the appellant company, according to the documents from the two businesses, were $73,898 for the financial year ending on December 31, 1995; $14,009 for the financial year ending on May 31, 1996; and $18,568 for the year ending on December 31, 1996. The invoices also disclose purchases of $1,027 from the appellant Robin Huet in the period from January to May 1995, that is, prior to the incorporation of the appellant 9021.

Table FT #6200 at Tab 16 of Exhibit I-1, according to the auditor, shows that in the case as a whole there was income of $30,641, $857 and $1,574 for the three respective financial years of 9021, which was not reported or accounted for in any form. [ 11 ] The auditor then produced in evidence a

summary of the adjustments, which is found at Tab 13 of Exhibit I-1 and represents the total unreported income for each of the financial years of the appellant 9021. In the table, he took care to distinguish the unreported income from the sale of metals but recorded as a loan repayment and the income from unrecorded metal sales and also other unreported income that he discovered in conducting his audit. An example of this last type of income is the amount of $25,584 that is found for the financial year ending on December 31, 1996.

This total comes from two amounts appearing at Tab 20 of Exhibit I-1, on adjusting entry 75, where the amount indicated is $12,115, and adjusting entry 50, where the amount indicated is $13,469. The first of these adjusting entries for the financial year ending on December 31, 1996, reduced the director's advance account by an amount of $12,115 to balance the payment of an advance from a company by the name of "les Mutuellistes" to the appellant 9021; the other reduced the director's advance account by an amount of $13,469 to balance a cash surplus.

The company "les Mutuellistes" advanced funds directly to the shareholder Robin Huet in his personal capacity, but the funds were deposited in the account of the appellant 9021. The problem came to light when Mr. Cavanagh was unable to determine the source of the funds that were used to repay the advances made by "les Mutuellistes". The audit of the bank accounts of 9021, of the shareholder Robin Huet and of Guylaine Duchaine did not uncover anything, which led Mr.

Cavanagh to conclude that the repayment was made in cash or from a bank account that had not been disclosed to him. [ 12 ] Another income amount unreported by the appellant 9021 is the one that was found for the financial year ending on May 31, 1996; it amounts to $10,000. This amount is shown on 9021's balance sheet as a loan without repayment terms and appears with another loan to 9021 by Marila Métal for an amount of $12,000. At the time of the audit, the appellant 9021 had no voucher attesting to the existence of the $10,000 loan.

Furthermore, at the opening of the following financial year, this loan was not recorded, which indicates either that it did not exist or that it was repaid with funds from an unknown source.

In the adjusting entries of the appellant 9021, the sales of that company were reduced by $10,000 to reflect the payment of this loan, but the appellant 9021 was unable to account for the loan or explain the adjusting entries. [ 13 ] The auditor accordingly included the above-mentioned amounts in the income of the appellant 9021 so that the financial statements of 9021 now show profits, which automatically eliminates the carryback to the taxation year ending on December 31, 1995, of the non-capital losses of $22,280. [ 14 ] The audit also dealt with the period prior to the incorporation of 9021, that is, the period from January 1 to May 31, 1995, when the appellant Robin Huet was the owner of the business.

Mr. Cavanagh testified that he basically did the same exercise in Mr. Huet's case as he had done in the case of 9021. Without going into all the details of this exercise, I note that the monetary advances by Marila Métal that were repaid by the sales of metal were involved here as well. The figure at issue is $14,034.85; it is shown at page 3 of Exhibit A-2, at adjustment number 15, and represents unrecorded sales as such.

His audit of the invoices of Marila Métal and Métal du Golfe enabled him to conclude that these businesses made purchases in the amounts of $1,027 and $928 respectively (Exhibit I-3, Tab 9 and Tab 18), which amounts were paid to the appellant but were not reported by him. Mr. Cavanagh produced in evidence a

summary of the adjustments, which is found at Tab 5 of Exhibit I-3. [ 15 ] The appeals lodged against the assessments made respecting the appellants Robin Huet and Guylaine Duchaine also deal with the shareholder benefits received during 9021's financial years when, respectively, they were that company's shareholder. For Robin Huet, this involved the first two financial years, and for Guylaine Duchaine, the last one. These are, therefore, the same amounts that were determined to be unreported income of the appellant 9021-- for the first two financial years, in the case of Mr.

Huet, and for the last financial year in the case of Ms. Duchaine. Since this income does not appear on 9021's balance sheets, the Minister contends that it is a shareholder benefit. [ 16 ] In the case of the appellant Guylaine Duchaine, Mr. Cavanagh explained that he included in her income the amounts of $25,584 and $19,093 as shareholder benefits in addition to 9021's unreported income of $14,340 for the financial year ending on December 31, 1996. He prepared, for the case, the exhibit filed as I-5, which analyses the item "owed to the director" for the financial years of 9021 at issue.

At the end of the financial year ending on December 31, 1996, the advances under the item "owed to the director" were reduced by $25,584, while there is no evidence that Guylaine Duchaine had actually withdrawn money from her bank accounts to repay what she owed to her company or what she had had from the income allowing her to make such repayment. According to Mr.

Cavanagh, Guylaine Duchaine therefore received a benefit resulting from the reduction of what she owed to 9021, with no evidence that she had made a repayment. [ 17 ] Based on the financial statements of 9021, he also noted from this analysis that the opening balance for the financial year that ended on December 31, 1996, shows a balance at May 31, 1996, of $30,264.43 owed to 9021 by the appellant Guylaine Duchaine, while

the balance sheet for the financial year ending on May 31, 1996, shows that the balance was $49,357. According to Mr. Cavanagh, he was unable to find any rationale for this reduction in Guylaine Duchaine's debt to 9021. Mr. Cavanagh emphasized that the amounts of money withdrawn from the company for the personal purposes of the shareholders were correctly accounted for by Guylaine Duchaine. [ 18 ] With respect to the appellant 9021, its financial statements were not balanced. According to the auditor, Mr. Cavanagh, they managed to balance the financial statements by playing with the inventory.

He explained that the closing balance at May 31, 1996, showed inventories of $54,650 and that the opening balance for the next financial year showed $75,000. This, he said, would have allowed 9021 to increase the cost of the goods sold in the financial year ending on May 31, 1996, which would have resulted in understating the net profit of $20,350 reported by 9021 for the financial year ending on December 31, 1996. [ 19 ] In closing, Mr.

Cavanagh explained the assessment of the penalties by the size of the amounts of unreported income and by the fact that the failure to report had been repeated in the various financial years at issue. He contended that the appellants Guylaine Duchaine and Robin Huet were aware of the activities of 9021 and that controls were virtually non-existent. Many transactions were made for cash; the money was deposited in petty cash, and the transactions were not recorded. According to Mr. Cavanagh, this was a business where the accounting was clearly not up to the mark and where there were no acceptable controls.

The continuous presence of the appellants Guylaine Duchaine and Robin Huet at their place of business led him to conclude that they had to have known that all of 9021's income had not been reported. [ 20 ] The appellant Guylaine Duchaine was the one who did the bookkeeping for 9021 during the years at issue. She admitted that her knowledge in this area was very limited and that her method of recording the various transactions was inadequate. This explains, moreover, why the accountants' worksheets (Exhibits A-2 to A-4) contain a number of adjustments so that the financial statements could be prepared.

For every month of 9021's operations, Ms. Duchaine prepared a document that she called the reconciliation of sales and it was these reports that she gave the accountant at the end of every financial year. As Exhibit A-6, she produced in evidence the months for the last financial year at issue, that is, the one ending on December 31, 1996. She was unable to locate the reports for the earlier financial years but they were all prepared according to the same principles. [ 21 ] Each report itemized the business figure for the month. Ms.

Duchaine admitted that a number of non-invoiced sales had been made by the employees. To determine the amount of these sales, she added up all the deposits made during the month to the 9021 accounts, the amount of the salaries and the amount of the invoices paid in cash. From this total, she subtracted the invoiced sales and obtained a total for the non-invoiced sales. Since the report in question was also used for the purpose of the GST and QST remittances, she subtracted the amount of the two taxes to obtain only the total amount not invoiced after payment of the taxes. The business figure calculated by Ms.

Duchaine did not include the taxes collected on sales during the month. [ 22 ] Ms. Duchaine explained that, in addition to these monthly reports, she gave her accountants the statements of account relating to the sales made by 9021 to Marila Métal. As we know, Marla Métal made monetary advances to 9021 to enable it to buy old automobile hulks. These cars were subsequently sold to Marila Métal and the amount of the advances was repaid by deducting this amount from the invoice for the vehicles sold in this way.

Not knowing how to account for this and since the documentation of Marila Métal contained all the details, Ms. Duchaine put it all in an envelope and gave it to the accountant at the end of the financial year. According to Ms. Duchaine, everything was entered in her monthly reports except the invoices prepared for Marila Métal, which showed the repayment of the advances. [ 23 ] In closing her testimony, Ms.

Duchaine stated that she accounted for all of the cash withdrawals that she and her common-law spouse, the appellant, Robin Huet, made for their personal purposes, and that the accountant entered them as shareholder advances. [ 24 ] Michel Légaré prepared the financial statements of 9021 as at December 31, 1996, which are found at Tab 3 of Exhibit I-1. His testimony primarily dealt with a long-term liability of 9021 in an amount of $10,000 and identified on the financial statements of May 31, 1996, (Exhibit I-1, Tab 2) as a loan without repayment terms.

He testified that, in his preparation of the financial statements of December 31, 1996, he included this amount under liabilities at the "creditors" line item. According to him, this is a sum of money advanced by Marila Métal, which amounted to $11,000 at the end of the financial year. [ 25 ] Mr. Légaré also testified that, in his financial statements of December 31, 1996, he made an adjustment in the "owed to the director" account in respect of the loans made by 9021 to a lending company by the name of "les Mutuellistes".

Knowing that "les Mutuellistes" did not lend to businesses and that it therefore lent only to individuals, he prepared the financial statements accordingly since the investment came, at that time, from the shareholders and not from "les Mutuellistes". The preceding financial statements referred to notes payable to "les Mutuellistes", whereas there were no such notes. Mr. Légaré therefore adjusted his year-end balance so that it would square with the information that he had been given; this adjustment is found in the "owed to the director" account.

He ended by saying that, according to him, the reported income of 9021 included all the sales made to Marila Métal because, in the monthly reports, Ms. Duchaine added up all the deposits, then she remitted the taxes payable on the deposits according to what her first accountant had told her needed to be done. Mr. Légaré concluded that the sales to Marila Métal were accounted for in the financial statements of 9021.

He did not, however, make an audit report. [ 26 ] Renald Gaudreau is the person who prepared the worksheets (Exhibits A-2 and A-3) that were used to prepare all the financial statements of 9021 and of Robin Huet, except the last one. Mr. Gaudreau confirmed that the amount of the sales reported comes from the account book that Guylaine Duchaine kept and gave him at the end of each financial year. He prepared a

summary of every month that he filed in evidence (Exhibit A-7). According to Mr. Gaudreau, all of the invoices from Marila Métal, thus, all the sales to it, are included in 9021's income because what is shown in the "sales" account came from petty cash and the money deposited in the bank. He qualified his answer by saying that, if they were entered in the book (Exhibit A-5) that Ms. Duchaine kept, the sales to Marila Métal were included. If a loan was involved, Ms. Duchaine indicated it. Mr.

Gaudreau added that, for the purposes of the GST and QST remittances, he also used the monthly reports that she prepared. [ 27 ] On cross-examination, Mr. Gaudreau explained that the many adjustments made to the worksheets were necessary to compensate for the information about the transactions that the bookkeeping of Ms. Duchaine did not provide. He explained how he performed the reconciliation on his worksheets for the sale and exchange of used cars. He carried out the same reconciliation in the case of the loans

that 9021 had made to Marila Métal. The information for the financial year at issue came from the cheque issued by Marila Métal and the invoices prepared for it. He was unable to confirm that the sales to Marila Métal were recorded in the reports or the books given to him by Ms. Duchaine but said he was convinced that they were accounted for. In closing, he said that Ms. Duchaine's bookkeeping was done on the cash-based accounting system, which required him to ask her a number of questions at the end of the year.

On occasion, he would verify some cheques and invoices, but often all he had to work with were the balances given to him by Ms. Duchaine. [ 28 ] Bernard Brosseau, an accountant, testified for the appellants. According to him, the auditor's work in his

summary of the adjustments (Exhibit I-2, Tab 6) is inaccurate in that he added the income from the sale of the metal recorded as a loan repayment to the additional income from the sale of metals, whereas in reality the two elements are the same thing, that is, sales of metal. He contended that the auditor had thus doubled the figure for the metal sales and by that very fact had doubled the figure for the income. [ 29 ] Mr.

Brosseau subsequently tried, after a fashion, to show from the worksheets filed as Exhibits A-2, A-3 and A-4 that the income from the sale of metal to Marila Métal was in fact recorded as income in the "cash" account. He explained his reasoning by saying that all of the cash advances made by Marila Métal to 9021 in a financial year were accounted for on the worksheets and that the total for the advances was reduced by the figure for the sales by 9021 to Marila Métal. Therefore, according to Mr.

Brosseau, it was necessary to account for the sales to Marila Métal by reducing the advances, and the proceeds of these sales are found in the "cash" account with the non-invoiced transactions. The sales to Marila Métal are therefore accounted for on the worksheets prepared by the accountants, which served in the preparation of the financial statements that were used to make the tax returns. [ 30 ] On cross-examination, Mr. Brosseau acknowledged he had tried to reconstruct the financial statements of 9021 for the financial years at issue.

This work was done before he could obtain the previous accountants' worksheets. In his opinion, these financial statements had no value and were not used by the appellants in any way. He explained that, on the basis of his own work and that of the other accountants, he was certain that all of the income of the appellant company had been accounted for because, having examined the expenses paid for in cash, it was normal to conclude that there was the equivalent in cash income that was needed to balance the cash. Mr. Brosseau acknowledged that Ms.

Duchaine's bookkeeping was not consistent but maintained that the worksheets filed in evidence were sufficient for him to conclude that all income was reported. 9021 [ 31 ] In the case of the appellant 9021, it must be determined whether the Minister of National Revenue was correct in including in 9021's income reported for each of the taxation years ending on December 31, 1995; May 31, 1996; and December 31, 1996, the amounts of $73,362, $22,337 and $60,274 respectively, and in assessing a penalty for each of these taxation years, and whether he was justified in not recognizing its entitlement to carry back a non-capital loss of $22,280 from the taxation year ending on December 31, 1996, to the year ending on December 31, 1995. [ 32 ] Was the income from the sale of metal to the company SNF Inc., that is, to Marila Métal and Métaux Bastille, included in the income of the appellant 9021, for the three taxation years at issue?

The evidence presented by 9021 on that point lacked precision because Ms. Duchaine's bookkeeping was very rudimentary and required 9021's accountants to adjust the whole thing at the end of the financial years. Accordingly, the results produced by Mr. Cavanagh's audit in the case at bar are hardly surprising. [ 33 ] The total for the sales of metal by the appellant 9021 to Marila Métal is fairly substantial.

To reconstruct these sales, the auditor used the invoices that Marila Métal had in its possession, and it was from the information found on them and what was contained in the financial statements that he made the findings that justified the reassessments. The financial statements were consistent with the worksheets that the company's accountants worked with. In order to make the adjustment he planned, that is, the one that involved treating the income from the sale of metal as being accounted for as a loan repayment, Mr. Cavanagh used the worksheets of the accountants of 9021.

These worksheets were prepared by the accountants in accordance with the information that they obtained from Ms. Duchaine. Such being the case, Ms. Duchaine testified that the monthly reports that she gave to the accountant at the end of the financial year did not contain the details of the transactions entered into with Marila Métal, namely, the monetary advances and the sale of metal since she did not know how to record them when she did her bookkeeping.

She therefore gave all the information relating to these advances and sales to the accountant in one envelope so that he could take it into account in preparing the financial statements. Ms.

Duchaine also testified that, because of the kind of business that 9021 was, a number of its commercial transactions were made in cash without an invoice and that, in order to determine the income of 9021 and the amount of the GST and QST to be remitted, she relied on the total monthly deposits in 9021's bank account. [ 34 ] The sales made to Marila Métal by the appellant 9021 are all documented and represent fairly large amounts of money. The evidence showed that the payment by Marila Métal of the invoices relating to these sales was made by cheque.

Each invoice itemized the amount of the loan and the amount of the repayment and was given to 9021's accountants. Ms. Duchaine and the three accountants of 9021 all agreed in concluding that the income from the sales of metal to Marila Métal was entered in the "cash" account on the worksheets since the amount shown there represented the total sales made by 9021 during the financial years at issue. [ 35 ] Ms. Duchaine's bookkeeping, although rudimentary, nonetheless seemed to contain all of the information relating to 9021's business transactions.

She was careful to indicate every withdrawal of money made by 9021 in order to pay for the personal expenses of her and her spouse. She kept the documents relating to the purchase and resale of used cars and the purchases of cars that 9021 paid for in cash. Given the sales that were not invoiced and not recorded, some serious doubts might linger as to whether all of 9021's income was reported but, as we know, Ms. Duchaine added up 9021's deposits and it was on the basis of these amounts that she reconstructed the sales.

She also gave 9021's accountants all of the information relating to the transactions entered into with Marila Métal so that they could make the necessary adjustments. She calculated the sales on the basis of the deposits. [ 36 ] In my opinion, Ms. Duchaine testified with a great deal of sincerity and credibility about her knowledge of the duties she had and was required to fulfill for tax purposes.

She was the one who handled everything relating to the accounting and I am prepared to accept that the income from the sales of metal to Marila Métal was deposited in 9021's account, that it is found in 9021's financial statements and was, therefore, reported. I have reached this conclusion for the three financial years corresponding to each of the taxation years at issue of 9021. This automatically leads to the cancellation of the penalties assessed in respect of the amounts of $73,362, $12,337 and

$14,340 for the three financial years ending on December 31, 1995; May 31, 1996; and December 31, 1996, respectively. [ 37 ] Mr. Cavanagh's audit also showed that an amount of $10,000 for the financial year ending on May 31, 1996, and another amount of $25,584 for the one ending on December 31, 1996, were not reported as income by the appellant 9021. The amount of $10,000 surfaced in the adjusting entries when the appellant 9021 reduced the sales for the financial year by that amount by treating it as a loan, while this amount was not entered when the next financial year began.

According to the auditor, the amount is therefore not a loan but rather results from sales that were not reported in the financial year. [ 38 ] The audit also showed that, by means of an adjusting entry for the financial year that ended on December 31, 1996, the director's advance account was reduced by $12,115 in order to balance the payment of the debt of 9021 to "les Mutuellistes". A second adjusting entry shows an investment of $13,469 by the shareholder intended to balance 9021's cash surplus. According to Mr.

Cavanagh, there was nothing in the shareholder's personal bank account that discloses a disbursement that could substantiate this state of affairs. In fact, there is no source of income that could explain the source of the funds in question. [ 39 ] Mr. Cavanagh's audit also showed that, in the preparation of 9021's financial statements for the financial year ending on December 31, 1996, an amount of $75,000 was shown as the value of the inventory at the beginning of the financial year, whereas the value shown at the end of the preceding financial year had been $54,650.

The result of this was therefore an understatement of $20,350 in income reported by the appellant company for the taxation year ending on December 31, 1996. [ 40 ] The appellant 9021 gave no evidence that could justify the adjusting entries relating to the amounts mentioned above.

An attempt was made to explain the monetary advances made by the shareholder, which funds came from a loan the shareholder gave to "les Mutuellistes", but these explanations remained vague, with the exception of the fact that the accounting entries identified the loans obtained from "les Mutuellistes" as being those of 9021 and not the shareholder. It was only the final financial statements that corrected that anomaly. I do not, however, have any evidence before me that would allow me to clarify this situation.

Under the circumstances, the Minister was right to find that the amounts of $10,000 for the taxation year ending on May 31, 1996, and $12,115 and $13,469 for the year ending on December 31, 1996, were unreported income. [ 41 ] The same is true of the amount of $75,000 indicated as being the value of the inventory at the beginning of the financial year ending on December 31, 1996, while it should have been $54,650 or the value of the inventory at the end of the preceding financial year. The appellant 9021 provided no explanation on this subject.

Accordingly, there was an understatement of $20,350 of the income reported by 9021 for the taxation year ending on December 31, 1996. [ 42 ] Although Ms. Duchaine lay blame on the accountants of 9021 for some of the mistakes identified by Mr. Cavanagh in his audit, nonetheless, under circumstances such as those existing in the case at bar, where a taxpayer makes a false statement on its tax returns, it becomes liable to a penalty assessed by the Minister under subsection 163(2) of the Act .

In the case at bar, the respondent demonstrated, on a balance of probabilities, that in its returns for the taxation years ending on May 31, 1996, and on December 31, 1996, the appellant 9021 knowingly made a false statement or omission concerning the amounts of $10,000 and $25,584 respectively, which justified the assessment of penalties. Guylaine Duchaine [ 43 ] The onus is on the appellant Guylaine Duchaine to show on a balance of probabilities that the assessment made by the Minister is incorrect.

In the case at bar, as I found in the case of 9021, the evidence has satisfied me that the income from the sale of metal was reported and does not constitute a benefit conferred on Guylaine Duchaine. I cannot, however, conclude that the evidence presented by 9021 relating to the other aspects of the assessment, namely, the taxable benefits that this appellant received, the evidence of which consists of the financial statements filed, is sufficient to find that Guylaine Duchaine has discharged her burden.

She and her witnesses were unable to explain the irregularities found by the auditor in the financial statements that led him to conclude that she had received a benefit. The director's advance account was reduced by $25,584 during the financial year ending on December 31, 1996, and there was no evidence to justify this reduction. At May 31, 1996, the balance in the director's advance account was $49,358 and was reduced to $30,265 as at June 1. This reduction of $19,093 was never explained by Guylaine Duchaine.

A total benefit of $44,667 was therefore conferred by 9021 on the appellant, being the director of 9021 during the period at issue, which benefit is taxable for the 1996 taxation year under subsection 15(1) of the Act . [ 44 ] As I found in the case of 9021, I am satisfied that the respondent has shown on a balance of probabilities that the appellant Guylaine Duchaine knowingly made a false statement or omission in reporting her income for her 1996 taxation year. The amounts at issue are fairly substantial and the bookkeeping was of a nature that made it difficult to prepare the financial statements.

No explanation was provided that could justify the irregularities detected in the financial statements by the audit, except that they were said to be very obvious. The penalties are therefore justified in the circumstances. Robin Huet [ 45 ] As in the case of the appellant Guylaine Duchaine, I find that the sales of metal were reported in the financial statements of 9021 for the financial years ending on December 31, 1995, and May 31, 1996. I also find that, for the period from January 1 to May 31, 1995, the appellant reported sales of metal totalling $15,990 as income.

In respect of the shareholder benefit that, in the assessment, was fixed at $10,000 for the period from January 1 to May 31, 1996, and that flows from adjusting entry number 12, dated May 31, 1996, which entry reduces the amount of the sales by the creation of a liability that does not appear on the opening balance of the appellant 9021 for the following financial year, no evidence was adduced that could explain, much less justify, this entry. Robin Huet therefore received a benefit according to subsection 15(1) of the Act .

As in the two preceding cases, the assessment of a penalty is justified under the circumstances. [ 46 ] The appeals are accordingly allowed. In view of the appellants' divided success, I shall not award costs. The assessments are accordingly referred back to the Minister of National Revenue for reconsideration and reassessment. Signed at Ottawa, Canada, this 24th day of March 2003.

"François Angers" J.T.C.C. Translation certified true on this 7 th day of May 2004. Sophie Debbané, Revisor