2015 QCCQ 1176, 2015 QCCQ 1176

Unofficial English Translation Catudal c. Québec (Sous-ministre du Revenu) 2015 QCCQ 1176 COURT OF QUEBEC (Administrative and Appeals Division) CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL “Civil Division” No.: 500-80-017158-107 DATE: February 26, 2015 ______________________________________________________________________ PRESIDED BY: THE HONOURABLE ARMANDO AZNAR, J.C.Q. ______________________________________________________________________ MICHEL CATUDAL Plaintiff v.

DEPUTY MINISTER OF REVENUE OF QUEBEC Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] The Court has before it the plaintiff’s appeal from eleven (11) income tax notices of assessment issued by the defendant on September 2, 2009. [ 2 ] These notices of assessment cover the taxation years from 1995 to 2005 inclusively, and were issued under the Taxation Act . [1] [ 3 ] The plaintiff's appeal also concerns a notice of assessment issued on August 24, 2009, under the Act respecting the Québec Sales Tax , [2] for the period between January 1, 1995 and December 31, 2005. [ 4 ] The income tax notices of assessment were filed into the record (Exhibits P-6 to P-16) and detail the amounts in capital, interest, and penalties claimed by the defendant from the plaintiff. [ 5 ] The assessments in question and the amounts claimed are detailed in paragraph 44.2 of the plaintiff's motion in appeal: [ translation ] 44.2.

INCOME TAX EXHIBIT DATE NOTICE YEAR RIGHTS PENALTY INTEREST TOTAL P-6. 2009-09-02 MM818305C01 1995 $3,930.01 $730.99 $7,975.51 $13,636.51 P-7 2009-09-02 MN349107C01 1996 $9,812.30 $4,693.80 $17,384.73 $31,890.83 P-8 2009-09-02 ML563110C01 1997 $9,618.43 $4,675.65 $14,973.55 $29,267.63 P-9 2009-09-02 MP428647C01 1998 $10,806.85 $5,179.47 $14,361.46 $30,347.78 P-10 2009-09-02 MR889906C01 1999 $12,815.22 $6,245.98 $14,391.80 $33,453.00 P-11 2009-09-02 MR969542C01 2000 $16,087.58 $7,551.59 $14,815.19 $38,454.36 P-12 2009-09-02 MP517219C01 2001 $18,273.20 $8,769.46 $13,812.26 $40,854.92 P-13 2009-09-02 MM525827C01 2002 $16,323.64 $7,798.06 $10,400.41 $34,522.11 P-14 2009-09-02 ML136142C01 2003 $15,918.33 $7,336.80 $8,256.27 $31,511.40 P-15 2009-09-02 MM338944C01 2004 $13,458.97 $6,367.71 $5,601.05 $25,427.73 P-16 2009-09-02 ML901401C01 2005 $4,217.40 $2,100.38 $1,332.27 $7,650.05 [ 6 ] As for the appeal from the assessment issued by the defendant under the Act respecting the Québec Sales Tax , the plaintiff

describes it as follows in paragraph 44.1 of his amended motion in appeal: [ translation ] 44.1. QST 44.1.1. "P-5": Notice 0008321 issued on 2009-08-24 for the period between 1995-01-01 and 2005-12-31, $189,702.41 in principal, $123,306.55 in penalties and $185,370.14 in interest; [ 7 ] Through his Amended motion in appeal dated November 12, 2013, the plaintiff objects to the assessments issued by the defendant. Essentially, the grounds he raises in support of his motion are: I. Assessments issued under the Quebec Taxation Act a. The assessments were issued after the three-year statutory limitation period under paragraph 1010(2) (

a) of the Taxation Act had expired; b. The proceeds of crime are not taxable; c. The gross income upon which the reassessments issued by the defendant (Exhibits P-6 to P-16) were calculated is wrong and, moreover, the defendant failed to deduct salary, car expenses, and bad debts; d. The facts of the case do not justify the imposition of the penalty under

section 1049 of the Taxation Act ; II. Assessments issued under the Act respecting the Québec sales tax a. Sales tax is not collected on the proceeds of crime; b. It was not up to the plaintiff operating the "Hot Boys" agency to collect the sales tax but up to the [ translation ] "prostitutes", as independent entrepreneurs, to do so; c. If sales tax did have to be collected, it was not on the overall gross income earned, but only on the 25% that was the plaintiff's share from the amount paid to the prostitutes by clients for services rendered; d. The facts of the case do not justify the imposition of the penalty under

section 59.4 of the Tax Administration Act . [3] [ 8 ] For its part, the defendant submits that the assessments issued are valid for the following reasons: I. Assessments issued under the Quebec Taxation Act a. Pursuant to paragraph 1010(2) (

b) of the Taxation Act , the minister may, at any time, make an assessment because the plaintiff "made a misrepresentation that is attributable to negligence or wilful default or has committed any fraud in filing the return"; b. It is trite law that the proceeds of crime are taxable; c. The plaintiff did not rebut the presumption that the notice issued by the minister is valid, which is set out under

section 1014 of the Taxation Act ; d. The defendant imposed the penalty under

section 1049 of the Taxation Act on the grounds that the plaintiff wilfully, or even carelessly or by gross negligence, failed to declare all of his income; II. Assessments issued under the Act respecting the Québec sales tax a. The plaintiff had to collect the sales tax on all of the services provided to his clientele, even those that were criminal in nature; b. The prostitutes offered their services on behalf of the "Hot Boys" agency operated by the plaintiff, not on their own behalf; it is therefore the plaintiff who is responsible for the uncollected taxes, not the prostitutes; c.

The sales tax must be calculated based on the total amount paid by the recipient of the prostitution service (the client), not only on the 25% share of this amount that was due to the "Hot Boys" agency operated by the plaintiff; d. The Court may not intervene to reduce or cancel the penalty equal to 15% of the amount of uncollected taxes, which penalty is set out under

section 59.2 of the Tax Administration Act , because the said penalty is statutory; e. The defendant imposed a penalty of 50% of the uncollected sums in accordance with

section 59.4 of the Tax Administration Act on the grounds that the plaintiff wilfully, or even carelessly or by gross negligence, failed to collect and remit the sales tax. [ 9 ] To better circumscribe the substance of the dispute opposing the parties, the Court finds that it would be useful to refer to some

of the allegations contained in the defendant's defence, particularly the following: [ translation ] 46. The plaintiff operated an illegal prostitution business ; 47. The plaintiff owned an escort service, which he operated under the trade names of "Agence Bel-Homme Enr." as of 1994 and "Agence Hot Boys Enr." starting in 1997; 48. The plaintiff was the sole director and manager of the business; 49. According to the enterprise registry, this business was a type of escort and private dancer service; 50. It appears that this business was struck off the registry at the appellant's request on June 3, 2004; 51.

On April 6, 2005, the plaintiff was arrested; 52. During the arrest, the agency's accounting books, client list, and escort list were seized; 53. On July 6, 2005, the plaintiff was summoned to appear to face charges of sexual exploitation, sexual assault, and procuring for acts committed between June 1, 2001, and April 7, 2005; 54. On October 25, 2006, in the file bearing docket number 500-01-008538-057, the plaintiff was sentenced to forty months' imprisonment on thirty-seven counts; 55. Between 1995 and 2005, the plaintiff declared an average annual income of $13,261. 56.

The income declared by the plaintiff for the years 1995 to 2005 was as follows: Employment income Interest and other investment income Gross real estate rental income Net real estate rental income Gross business income declared Net business income Declared income 1995 $40 $940 $37,070 $-2 $14,910 $6,122 $7,100 1996 $1,335 $49,450 $211 $12,595 $4,538 $6,084 1997 $1,141 $47,917 $3,171 $14,190 $4,317 $8,629 1998 $895 $45,360 $4,483 $15,375 $4,404 $9,782 1999 $17 $790 $59,470 $8,031 $14,540 $3,353 $12,191 2000 $870 $59,385 $12,917 $14,290 $3,601 $17,388 2001 $906 $65,090 $8,512 $13,455 $2,864 $12,282 2002 $585 $62,303 $12,409 $12,580 $2,210 $15,204 2003 $930 $49,715 $7,958 $12,695 $3,247 $12,135 2004 $1,402 $48,303 $14,669 $12,845 $3,815 $19,886 2005 $2,092 $53,115 $23,093 $0 $0 $25,185 Total $57 $11,886 $577,178 $95,452 $137,475 $34,471 $145,866 Avg. $29 $1,081 $52,471 $8,677 $12,498 $3,497 $13,261 57.

During the police search, over 2,900 client records were seized; 58. Each record included, among other things, the client’s last or first name, the dates on which services had been rendered, the names of the escorts who had rendered those services, and the amount charged for each service; 59. To calculate the gross income generated by the plaintiff's prostitution activities, all the transactions from the client records were added up for each year; 60. According to the plaintiff, escorts kept 75% of the amount collected for prostitution activities; 61.

Consequently, for the years 1995 to 2005, the business's gross income and the plaintiff's share were: Gross business income . Share of Michel Catudal Total 1995 $123,853.00 $30,963.25 Total 1996 $202,609.00 $50,652.25 Total 1997 $194,377.00 $48,594.25 Total 1998 $211,213.00 $52,803.25 Total 1999 $236,753.00 $59,188.25 Total 2000 $283,623.00 $70,905.75 Total 2001 $320,620.00 $80,155.00 Total 2002 $286,298.00 $71,574.50 Total 2003 $273,872.00 $68,468.00

Total 2004 $237,285.00 $59,321.25 Total 2005 $62,835.00 $15,708.75 Total $2,433,338.00 $608,334.50 62. The plaintiff's gross business income between 1995 and 2005 therefore totalled $2,433,338.00; 63. The gross income declared by the plaintiff for the years 1995 to 2005 was $137,475, according to his income tax returns; 64. The defendant therefore had to modify the income declared by the plaintiff accordingly; 65.

The additional, undeclared, income from the plaintiff's escort agency caused the following changes to the plaintiff's gross business income; Declared gross business income Gross business income according to client records Additional gross business income 1995 $14,910.00 $123,853.00 $108,943.00 1996 $12,595.00 $202,609.00 $190,014.00 1997 $14,190.00 $194,377.00 $180,187.00 1998 $15,375.00 $211,213.00 $195,838.00 1999 $14,540.00 $236,753.00 $222,213.00 2000 $14,290.00 $283,623.00 $269,333.00 2001 $13,455.00 $320,620.00 $307,165.00 2002 $12,580.00 $286,298.00 $273,718.00 2003 $12,695.00 $273,872.00 $261,177.00 2004 $12,845.00 $237,285.00 $224,440.00 2005 $0.00 $62,835.00 $62,835.00 Total $137,475.00 $2,433,338.00 $2,295,863.00 Avg. $12,497.73 $221,212.55 $208,714.82 66.

As for the changes to the plaintiff's net income, they were revised by the defendant as follows: Plaintiff's share according to client records Declared business expenses TP1 Revised net business income Net business income declared according to TP1 Plaintiff's additional net business income 1995 $30,963.25 $8,788.00 $22,175.25 $6,122.00 $16,053.25 1996 $50,652.25 $8,057.00 $42,595.25 $4,538.00 $38,057.25 1997 $48,594.25 $9,873.00 $38,721.25 $4,317.00 $34,404.25 1998 $52,803.25 $10,971.00 $41,832.25 $4,404.00 $37,428.25 1999 $59,188.25 $11,187.00 $48,001.25 $3,353.00 $44,648.25 2000 $70,905.75 $10,689.00 $60,216.75 $3,601.00 $56,615.75 2001 $80,155.00 $10,591.00 $69,564.00 $2,864.00 $66,700.00 2002 $71,574.50 $10,370.00 $61,204.50 $2,210.00 $58,994.50 2003 $68,468.00 $9,448.00 $59,020.00 $3,247.00 $55,773.00 2004 $59,321.25 $9,030.00 $50,291.25 $3,815.00 $46,476.25 2005 $15,708.75 $0.00 $15,708.75 $0.00 $15,708.75 Total $608,334.50 $99,004.00 $509,330.50 $38,471.00 $470,859.50 Avg. $55,303.14 $9,000.36 $46,302.77 $3,497.36 $42,805.41 67.

The plaintiff's additional net income amounts to $470,860.00; 68. This net income takes into account the business expenses declared by the plaintiff; 69. These business expenses in fact match the accounting books seized from the defendant; 70. The following eleven (11) notices of assessment were therefore issued by the defendant to be added, inter alia , to line 156 of the income tax return, the amounts of additional net business income stated in paragraph 66 herein above. 1995 MM818305C01 D-1 1996 MN349107C01 D-2 1997 ML563110C01 D-3 1998 MP428647C01 D-4 1999 MR889906C01 D-5 2000 MR969542C01 D-6

2001 MP517219C01 D-7 2002 MM525827C01 D-8 2003 ML136142C01 D-9 2004 MM338944C01 D-10 2005 ML901401C01 D-11 71. The notices of assessment also include an added penalty under

section 1049 of the Quebec Taxation Act , C.Q.L.R., c. I-3 (hereinafter the T.A. ) representing 50% of the additional rights; 72. The penalties imposed were calculated as follows: Plaintiff's additional income . Rights Penalty 1049 T.A.

D-1 $16,053.25 $3,461.99 $1,730.99 D-2 $38,057.25 $9,387.61 $4,693.80 D-3 $34,404.25 $9,351.30 $4,675.65 D-4 $37,428.25 $10,356.65 $5,179.47 D-5 $44,648.25 $12,491.70 $6,245.98 D-6 $56,615.75 $15,846.05 $7,551.59 D-7 $66,700.00 $17,957.83 $8,769.46 D-8 $58,994.50 $16,025.49 $7,798.06 D-9 $55,773.00 $15,114.57 $7,336.80 D-10 $46,476.25 $13,181.43 $6,367.71 D-11 $15,708.75 $4,201.16 $2,100.38 Total $470,859.50 $127,375.78 $62,449.89 73.

As appears from paragraph 8 of his motion, the plaintiff has admitted that he knowingly failed to declare his income from illegal activities fearing that it would give him away to the police; 74. The undeclared income is significant, amounting to $470,859.50; FACTS [ 10 ] For the purpose of this judgment, the Court will summarize the relevant facts of this case below. [ 11 ] After high school, the plaintiff took a year off to work in a warehouse.

He quickly realized that he needed a better degree to get ahead in life and started a college degree in administration with a specialization in finance, which he completed in 1977 at the age of 21. This program of study covered administration, accounting, and finance. [ 12 ] In 1977, the plaintiff found work with the National Bank of Canada (hereinafter the "Bank") as an intern. His goal was to become an accountant with the Bank. He worked there from 1977 to 1981.

During this time, he witnessed several armed robberies, which induced him to leave his job. [ 13 ] After being out of work for about a year, he worked on temporary contracts for the defendant from 1983 to 1987, performing income tax audits. [ 14 ] In 1987, the plaintiff inherited a sum of money, which he describes as significant, upon his father's death. He stopped working and states that he lived off the interest generated by the inheritance. [ 15 ] Starting in 1989, the plaintiff bought rental units from which he received an income. [ 16 ] In December of 1993, the plaintiff decided to start an escort service.

In 1994, he registered a sole proprietorship business under the name "Agence Bel-Homme Enr." in the enterprise registry. In 1997, he registered another sole proprietorship business under the name "Agence Hot Boys Enr." (Exhibit D-23). [ 17 ] The plaintiff started operating his business by looking for escorts through ads placed in magazines and newspapers. He also sought clients for the escorts through these same ads (Exhibit D-31). [ 18 ] The escorts, who were males, offered a large array of services: massages, dances, company, and a variety of sexual acts.

The plaintiff himself was not an escort. [ 19 ] When a potential escort called him, the plaintiff asked him to describe his physical appearance to determine whether it would be worthwhile to meet. He made a note of the details relating to the individual and his contact information. An example of these notes is found under exhibit D-27. [ 20 ] If the plaintiff approved of an individual because he met his clients' expectations, he would set up a meeting, which usually took place in the plaintiff's apartment.

The plaintiff could then personally confirm the previously provided information. [ 21 ] According to the plaintiff, the escort would usually show him his body during the meeting and the plaintiff would take

advantage of the situation to have sex with him. The plaintiff and escort would also discuss the services that might be rendered and their prices. [ 22 ] The prices required for the services varied between $80.00 and $120.00 per hour, with extras for some sexual acts. The client paid the escort directly.

The escort then gave the plaintiff 25% of what he had received, giving the plaintiff either cash or depositing the money directly into his bank account. [ 23 ] According to the plaintiff, when a prospective client called, he would ask what kind of services the client was looking for as well as the preferred time and place of the meeting. According to this information, the plaintiff then identified an escort that might be suitable and described him to the client.

He also informed the client of the prices charged by that escort. [ 24 ] After the client selected an escort, the plaintiff created a card to identify the client, unless one already existed. Examples of these cards are found under exhibits P-4A and P-4B. They are old library cards on which the plaintiff wrote a reference code that was non-significant (PDW, for example), that would allow him to identify the client elsewhere in his other books.

These client-cards contained the client's contact information and preferences. [ 25 ] Each time a client called, the plaintiff would record the date, the requested service, the prices discussed, and the escort suggested on the [ translation ] "client card". [ 26 ] The plaintiff then called the escort to see if he was available and interested in meeting with the client. If so, he gave him the client's contact information and confirmed the time of the meeting with the escort with the client. [ 27 ] The escort had to make his own way to the client's place.

Once there, both the client and the escort had to decide if they wanted to take things further. The escort was entirely free to refuse a client, which happened about 20% of the time according to the testimonies of the plaintiff and escort Patrice Martel, who was the only escort to testify at trial. [ 28 ] Sometimes the client refused the escort, but that happened more rarely.

The plaintiff states that when a client refused the escort, failed to pay for services rendered, or caused problems, he would cross out the meeting from the client card and add a note describing the incident. [ 29 ] If the escort and client were both willing, they discussed the client's needs in detail and agree on a price. Changes were always possible during the appointment.

The escort was supposed to obtain the money before rendering any services. [ 30 ] According to the plaintiff, once the requested services were rendered, an escort leaving his client would inform the plaintiff how much he had made and the plaintiff would record the amount that the escort owed him on a sheet of paper, an example of which is found under exhibit D-26. [ 31 ] The plaintiff generally received the money he was owed in cash, but sometimes the amount was deposited into his bank account. [ 32 ] The business operated by the plaintiff generated two types of income and expenses.

There was [ translation ] "legal" income and its associated expenses and [ translation ] "illegal" income and its associated expenses. [ 33 ] The plaintiff systematically separated the revenue streams, compiling and declaring his legal income to the defendant. With respect to his illegal income, he maintains that he deposited it all in a safety deposit box and did not touch it, since he had enough legal income to cover his living expenses. [ 34 ] In the plaintiff's view, legal income included services for company, dancing, and massages.

The expenses he considered to be legal included advertising and telephone charges. The income he considered illegal is that related to prostitution. [ 35 ] Furthermore, the plaintiff asserts that he vacationed for about 60 days every year and hired a replacement to operate his business during that time. Accordingly, he took 630 vacation days between 1995 and 2005. [ 36 ] The plaintiff declares that he always prepared his own tax returns.

He claims that every year from 1995 to 2005, he read the tax guides published by the defendant and this convinced him that the income tied to prostitution, i.e. the illegal portion, was not subject to income tax or sales tax. [ 37 ] With respect to the QST, from 1995 to 2005, the plaintiff claimed to be a small supplier and asserts that he did not believe that he had to register or collect the tax. [ 38 ] In April of 2005, while the plaintiff was meeting with a police officer who presented himself as a potential escort (prostitution), his apartment was searched.

In the context of this search, the officers of the Service the police de la Ville de Montréal broke down the front door of the plaintiff's apartment, arrested him, and seized all of his accounting books since 1994 as well as any registers and records he had compiled. [ 39 ] The plaintiff did not contest the charges laid against him and pleaded guilty a few months later. He was sentenced to 40 months' imprisonment. The Attorney General of Quebec confiscated the sum of $224,700.00 found in his sister's safety deposit box.

In this regard, he claims that this comprised the whole of the criminal proceeds he earned since 1994. [ 40 ] In the fall of 2009, all the plaintiff's bank accounts and rents were seized. He also received notices of assessment issued under the Act respecting the Québec Sales Tax (exhibit P-5) and the Taxation Act (exhibits P-6 to P-16). [ 41 ] The plaintiff filed an objection on November 29, 2009. In it, he sought the revision of the assessments and complained of Revenue Quebec's conduct.

ANALYSIS AND DISCUSSION I. Assessments issued under the Quebec Taxation Act a. Are the assessments issued by the defendant on September 2, 2009, for the taxation years 1995 to 2005 inclusively (exhibits P- 6 to P-16) statute-barred? [ 42 ] Paragraph 1010(2) (

a) of the Taxation Act states the principle that the time limit for issuing reassessments is three (3) years. This provision reads as follows: 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, (

a) within three years after the day of sending of an original assessment or of a notification that no tax is payable for a taxation year or the day on which a fiscal return for the taxation year is filed, whichever is later; [ 43 ] In some circumstances, the Minister may issue an assessment beyond the three (3) years stipulated in 1010(2)( a ), supra. Paragraph 1010(2) (

b) of the Taxation Act states: 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 [ 44 ] In this case, with respect to the reassessments issued by the defendant on September 2, 2009, for the taxation years 1996 to 2004 inclusively, the plaintiff argues that the assessments are statute-barred because they were issued after the three (3) year period under paragraph 1010(2) (

a) of the Taxation Act . [ 45 ] Relying on paragraph 1010(2) (

b) of the Taxation Act , the defendant submits that the notices of assessment issued are not statute-barred because the plaintiff misrepresented the facts respecting his business income, by negligence, wilful default, or even fraud. It also argues that the plaintiff admitted in paragraph 8 of his amended motion in appeal that he knowingly failed to declare all of his income.

This paragraph reads as follows: [ translation ] He could not declare his income from illegal activities for income tax purposes because he feared that he would immediately and automatically be reported to the police by employees of the tax authorities. [ 46 ] The defendant argues that this is the real reason the plaintiff did not declare all of his income. It posits that this is a judicial admission that makes proof against its author pursuant to

article 2852 of the Civil Code of Québec , which provides: 2852. An admission made by a party to a dispute or by an authorized mandatary makes proof against the party if it is made in the proceeding in which it is invoked. It may not be revoked, unless it is proved to have been made through an error of fact.

The probative force of any other admission is left to the appraisal of the court. [ 47 ] Taking the above into account and in light of the evidence adduced, the Court finds that the plaintiff's arguments that he believed he did not have to declare his illegal income is implausible and lacks credibility. [ 48 ] Indeed, how can the plaintiff seriously state that he did not think that his illegal income was not taxable when he also claims that the reason he could not declare it was because he feared being arrested and criminally charged? [ 49 ] In fact, the Court's assessment of the plaintiff's testimony is that he likely knew that his income from illegal sources was taxable but he simply decided not to declare it, fearing that he would be reported and arrested, and he thereby avoided having to pay the requisite income tax. [ 50 ] The plaintiff's credibility is very questionable.

Indeed, the Court notes that he worked as an auditor for Revenu Quebec from 1982 to 1987 under six (6) month employment contracts. Furthermore, after three (3) years studying a business administration technical program, he received his college diploma. Considering his knowledge, the sincerity of his testimony that he did not believe he had to declare his illegal income is questionable. [ 51 ] In this case, the plaintiff's obligation was merely to comply with

section 28 of the Taxation Act , which provides: 28. A taxpayer shall, to determine the income of the taxpayer for a taxation year for the purposes of this Part, (

a) add the aggregate of the taxpayer's income for the year, other than the taxable capital gains from dispositions of property, from each source inside and outside Canada; [ 52 ] Moreover, if the plaintiff feared being reported, as a reasonable person, he could have called the Ministère du Revenu du Québec anonymously to enquire as to his tax obligations and specifically whether he had to declare his illegal income.

He did not do so. [ 53 ] Finally, nothing prevented the plaintiff from consulting an accountant or tax specialist who could have counselled him quickly and clearly on his tax obligations and more specifically on his obligation to declare his illegal income. But again, he did not do so. [ 54 ] As for case law, in Racine v. Quebec (Deputy Minister of Revenue) , [4] Dalphond, J.A. summarized the criteria for the

application of paragraph 1010(2)(

b) of the Taxation Act, writing the following: [translation] [17] First, the trial judge set aside any waiver of the three-year limitation period by the appellant. He then quoted the followingremarks by his colleague in St-Martin v. Quebec (Deputy Minister of Revenue), (QC CQ), [2003] R.D.F.Q. 123(C.Q.): [111] ... - the "misrepresentation" in question need not necessarily be fraudulent; it is sufficient if it is false, even if it is made in good faith (MNRv. Taylor, 61 D.R.C. 1139); - the mere failure to declare an income may constitute misrepresentation (Racine v.

SMRQ, [1991] R.D.F.Q. 151 (C.A.)); - "negligence" is defined as [translation] "carelessness, neglect, sloppiness" and may even be the result of the actions of a mandatary(Succession Eileen Murray v. SMRQ (23 June 1992), Montreal 500-02-024285-892, Lachapelle, J.; Guimond v. SMRQ, [1991] R.D.F.Q.58); - the degree of negligence required is therefore lower than the gross negligence required by other provisions of the Act (Venne v. TheQueen, 84 DTC 62471; Jet Metal Produits Ltd. v. MNR, (TCC), 79 DTC 624); [29] In a recent judgment, (Quebec (Deputy Minister of Revenue) v.

Dea, (16 February 2006) Montreal 500-09-014489-041 (C.A.),Nuss, Morin, and Côté, JJ.A., the Court of Appeal addressed the notion of "misrepresentation and negligence" in the following terms: [translation] [2] Paragraph 1010(2)(

b) of the T.A. allows the three-year limitation period to be set aside if the taxpayer made "amisrepresentation that is attributable to negligence". That provision applies to this case because the failure to declare the capital gainstransactions was a misrepresentation and the negligence arises from the respondent's ignorance of his tax obligations. [3] Negligence may be likened to carelessness or a lack of diligence.

A taxpayer cannot simply hand all of his or her documents toan accountant who will prepare the tax return, fail to make any verifications, and then claim not to incur any liability with respect to thereturn. [55] In light of the foregoing, the Court finds that, given the specific circumstances of this case as previously set out, the plaintiff'sfailure to declare all of his income is a misrepresentation within the meaning of paragraph 1010(2)(

b) of the Taxation Act. [56] Here, the Court finds that, at the very least, the plaintiff displayed gross negligence and acted negligently. His failure to declareall of his income for a period of about ten years therefore allows the defendant, under paragraph 1010(2)(

b) of the Taxation Act, to assessthe plaintiff after the three-year period set out under the Act. [57] In his written submissions, the plaintiff asserts that from April of 2005 to the moment he was assessed in 2009, he did not hideanything from the defendant, who had in its possession all the accounting that was seized at the time of his arrest in 2005. He argues thatthe assessments were consequently issued belatedly and in violation of the Act. [58] In this respect, the Court points out that the Canadian and Quebec tax schemes are based on the principle of self-assessment.

Itis up to the taxpayer to voluntarily declare all of his or her income from any source. [59] For the four (4) years between his arrest and the moment the assessments were issued by the defendant, the plaintiff was silent.He did not inform the defendant that he had undeclared income or that he had not collected the sales tax.

Undoubtedly, he hoped that thetax authorities would not issue reassessments. [60] The evidence reveals that to issue the assessments in dispute, the defendant had to go through all the plaintiff's accountingbooks and meticulously collate over 2,900 client records containing in excess of 20,000 entries, in addition to the data checkingperformed by the auditor, Marie Josée Caza.

In the present case, it cannot be seriously argued that the defendant acted belatedlyfollowing the plaintiff's arrest. [61] Consequently, for the above reasons, the Court dismisses the plaintiff's argument that assessments P-6 to P-16 issued by thedefendant are statute-barred. b. Is income from the proceeds of crime taxable? [62] Regarding the taxation of income from illegal sources, it has been trite law for decades now in Canada that such income istaxable. [63] On this subject, as early as 1928, the Privy Council decided that income derived from the illegal trade of alcohol was taxable.

InCanada Minister of Finance v. Smith,[5] the Privy Council wrote: Construing the Dominion Act literally, the profits in question, although by the law of the particular Province they are illicit, come withinthe words employed. Their Lordships can find no valid reason for holding that the words used by the Dominion Parliament wereintended to exclude these people, particularly as to do so would be to increase the burden on those throughout Canada whose businesseswere lawful.

Moreover, it is natural that the intention was to tax on the same principle throughout the whole of Canada, rather than tomake the incidence of taxation depend on the varying and divergent laws of the particular Provinces. Nor does it seem to their Lordshipsa natural construction of the Act to read it as permitting persons who come within its terms to defeat taxation by setting up their own

wrong. There is nothing in the Act which points to any intention to curtail the statutory definition of income, and it does not appearappropriate under the circumstances to impart any assumed moral or ethical standard as controlling in a case such as this the literalinterpretation of the language employed. There being power in the Dominion Parliament to levy the tax if they thought fit, theirLordships are therefore of opinion that it has levied income tax without reference to the question of Provincial wrongdoing. [64] Recently, in Armeni v.

Agence du revenu du Quebec,[6] the Court of Appeal wrote: [translation] [1] The appellant, who has been sentenced to 19 years' imprisonment for trafficking cocaine, received a notice of assessment fromthe Agence du revenu du Quebec ("ARC") in the amount of $1,030,469.21, which included $607,025.44 in unpaid taxes, a $299,845.22penalty, and $129,935.90 in interest, which assessment he unsuccessfully disputed before the Court of Quebec, wherefore this appeal. [2] The first ground of appeal raises a question – whether illegal income is taxable – that has already been decided by both theSupreme Court of Canada and this Court. [3] This ground is therefore dismissed. [65] In light of the foregoing, the Court finds that the proceeds of crime are taxable under the Taxation Act. c.

Did the plaintiff rebut the presumption of validity under

section 1014 of the Taxation Act regarding the assessments at issue? [66] In this case, after the plaintiff's arrest and the seizure of the [translation] "accounting" documents in his possession concerningthe operation of his business, the minister reviewed the tax returns the plaintiff had filed for the years 1995 to 2005 and issuedreassessments (P-6 to P-16). [67] In light of the presumption of validity under

section 1014 of the Taxation Act, the plaintiff had the initial burden of"demolishing" this presumption for each of the assessments issued. To do so, he had to present sufficiently probative evidence againsttheir accuracy. [68] According to case law, the Court notes that the plaintiff's onus regarding the assessments at issue is the one established by theSupreme Court of Canada in Hickman Motors Ltd. v. Canada.[7] [69] On this question in particular, Claire L'Heureux-Dubé J. writes: ... 92 It is trite law that in taxation the standard of proof is the civil balance of probabilities: Dobieco Ltd. v.

Minister of NationalRevenue, (SCC), [1966] S.C.R. 95, and that within balance of probabilities, there can be varying degrees of proofrequired in order to discharge the onus, depending on the subject matter: Continental Insurance Co. v. Dalton Cartage Co., (SCC), [1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102 (T.C.C.), at p. 1106. The Minister, in making assessments, proceedson assumptions (Bayridge Estates Ltd. v. M.N.R., (CA EXC), 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onusis on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v.

Minister of National Revenue, (SCC), [1948] S.C.R. 486; Kennedy v. M.N.R., (FCA), 73 D.T.C. 5359 (F.C.A.), at p. 5361). The initial burden is onlyto “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337(F.C.T.D.), at p. 6340. 93. This initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least a prima faciecase: Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679 (T.R.B.).

In the case at bar, the appellant adducedevidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, the appellant “demolished” thefollowing assumptions as follows: (

a) the assumption of “two businesses”, by adducing clear evidence of only one business; (

b) theassumption of “no income”, by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence“demolishes” the Minister’s assumptions: see for example MacIsaac v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87D.T.C. 652 (T.C.C.). As stated above, all of the appellant’s evidence in the case at bar remained unchallenged and uncontradicted.Accordingly, in my view, the assumptions of “two businesses” and “no income” have been “demolished” by the appellant. 94.

Where the Minister’s assumptions have been “demolished” by the appellant, “the onus . . . shifts to the Minister to rebut theprima facie case” made out by the appellant and to prove the assumptions: Magilb Development Corp. v. The Queen, 87 D.T.C. 5012(F.C.T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are “twobusinesses” and “no income”. 95.

Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled tosucceed: see for example MacIsaac, supra, where the Federal Court of Appeal set aside the judgment of the Trial Division, on thegrounds that (at p. 6381) the “evidence was not challenged or contradicted and no objection of any kind was taken thereto”. See alsoWaxstein v. M.N.R., 80 D.T.C. 1348 (T.R.B.); Roselawn Investments Ltd. v. M.N.R., 80 D.T.C. 1271 (T.R.B.).

Refer also to Zink, supra,at p. 653, where, even if the evidence contained “gaps in logic, chronology, and substance”, the taxpayer’s appeal was allowed as theMinister failed to present any evidence as to the source of income. I note that, in the case at bar, the evidence contains no such “gaps”.Therefore, in the case at bar, since the Minister adduced no evidence whatsoever, and no question of credibility was ever raised byanyone, the appellant is entitled to succeed. 96.

In the present case, without any evidence, both the Trial Division and the Court of Appeal purported to transform the Minister’sunsubstantiated and unproven assumptions into “factual findings”, thus making errors of law on the onus of proof. My colleagueIacobucci J. defers to these so-called “concurrent findings” of the courts below, but, while I fully agree in general with the principle ofdeference, in this case two wrongs cannot make a right. Even with “concurrent findings”, unchallenged and uncontradicted evidence

positively rebuts the Minister’s assumptions: MacIsaac , supra . As Rip T.C.J., stated in Gelber v. M.N.R. , 91 D.T.C. 1030, at p. 1033, “the [Minister] is not the arbiter of what is right or wrong in tax law”. As Brulé T.C.C.J., stated in Kamin , supra , at p. 64: . . . the Minister should be able to rebut such [ prima facie ] evidence and bring forth some foundation for his assumptions. … The Minister does not have a carte blanche in terms of setting out any assumption which suits his convenience.

On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption. » [ 70 ] Here, the evidence as a whole, particularly the precise, meticulous and convincing testimony of the defendant's auditor, Marie- Josée Caza, has shown that the total gross income of $2,433,863.00 (Exhibit D-19) was established from the client records the plaintiff himself set up during the years he operated his business. [ 71 ] The evidence reveals that the plaintiff methodically documented the gross income his activities generated on over 2,900 client records. [ 72 ] A review by the auditor Caza of the client records put together by the plaintiff shows that the defendant's calculations, having regard to all of the circumstances in this case, are reasonable and representative of the income generated by the plaintiff's business. [ 73 ] The evidence further reveals that: a. in an Excel file, the defendant compiled all the gross income noted by the plaintiff and entered as business activity. b. the defendant deducted the income the plaintiff had previously declared from the reassessments. c. the auditor, Ms.

Caza, using a 10% sample drawn from the client records, tested the quality of the compilation work in the Excel file in question, which revealed no errors of any significance. [ 74 ] According to the testimony of the auditor, Ms. Caza, the defendant did not include the amounts that were struck or crossed out on the client records in calculating the plaintiff's gross income because, according to the plaintiff's testimony, he would strike the expected income and write down the reason if a client did not pay for the services provided.

Examples may be found in the RXA and PUE client records, which are both to be found under exhibit D-18. [ 75 ] The Court points out that the plaintiff has not presented serious evidence showing that the client records used by the defendant to establish the assessments did not reasonably reflect the realistic amount of gross income generated by his business. [ 76 ] Certainly, the plaintiff explained that in certain situations the amount appearing on the client record may have been noted before the service was provided or paid for, but in this respect, the evidence remains general and vague.

Significant and persuasive evidence has not been brought to the Court's attention. [ 77 ] The Court recalls that the plaintiff's mere assertion that there were bad debts is insufficient by itself to establish them without supporting documentary or circumstantial evidence. [ 78 ] On this issue, in St-Georges v. Quebec (Deputy Minister of Quebec) , [8] the Court of Appeal wrote: [ translation ] [11] A taxpayer's evidence must, however, include a certain degree of precision and probability in his favour rather than vague and ambiguous allegations.

As a general rule, a taxpayer's mere assertion will not suffice; it should be supported by documentary or circumstantial evidence. [12] To theorize that a taxpayer's mere denial can rebut the presumption of validity under

section 1014 T.A. would be to rob this provision of any meaning. [ 79 ] The plaintiff argues that his income should be calculated from the records he filed (Exhibit D-26) under [ translation ] "description of the amounts owed by the prostitutes" rather than from the 2,900 client records compiled under exhibit D-19, as the total income stated in the D-26 records is lower than that stated in the client records for the period covered by the assessments. [ 80 ] On this question, as the defendant points out, the plaintiff has forgotten to mention that exhibit D-26 reflects only the commissions that remained to be collected, not those that were already received. [ 81 ] When examined on November 18, 2013, the plaintiff testified as follows on this issue: [9] [ translation ] 757Q- So, based on the record, what did you do to know whether or not you'd been paid?

R-Oh, that. I had separate sheets for the escorts, you know, I had a separate sheet of paper that I would prepare, you know... those who owed me... well, he would finish his call. "O.K. I'm coming over to pay you." Then I wouldn't write anything. But otherwise, "I'll pay you in two (2) days," then I would write: "O.K. He owes me twenty bucks ($20). He owes me thirty bucks ($30)." I would make a separate note of it. 1295Q- Then it's the actual amount collected?

A- Yes, that's right, because it's the record of the money that the escorts owed me, you know, that... 1296Q- Uh-huh A- ... that I could collect. [ 82 ] Thus, the Court is of the view that the client records set up by the plaintiff, which reflect the payments received from clients or to be paid by them (those that are not crossed out), are definitive proof against the plaintiff. [ 83 ] In this respect,

article 2833 of the Civil Code of Québec provides: 2833. A domestic paper stating that a payment has been received or containing a mention that the entry compensates for the lack of a title in favour of the person for whose benefit it sets forth an obligation makes proof against its author. [ 84 ] The Court therefore finds that the defendant was amply justified in issuing the assessments (exhibits P-6 to P-16) on the basis of the gross income it calculated. [ 85 ] Finally, the Court finds that the plaintiff's testimony, even taking into account the documents he filed, is not sufficiently probative to "demolish" the presumption of validity under

section 1014 of the Taxation Act for any of the assessments that were issued. d. Deductions claimed by the plaintiff for the use of an automobile for business purposes [ 86 ] The plaintiff had the onus of specifically and convincingly proving the amounts he wanted to deduct from his gross business income for the use of his automobile for business purposes.

He did not provide any supporting documents to establish the existence of such expenses. [ 87 ] The plaintiff's accounting books do not reveal any information in this respect and he did not keep any travel or mileage logs of his use of his automobile for the purpose of operating his business. [ 88 ] According to the case law applicable here, the taxpayer must keep such logs to be able to deduct a car’s operating expenses as well as leasing and depreciation costs. [ 89 ] In Tremblay v.

The Queen , [10] Tardif, J. of the Tax Court of Canada, wrote: [44] In short, as soon as an automobile is made available, there is a presumption that 12,000 kilometers a year or 1,000 kilometers a month are driven for personal purposes. [45] As this is a presumption, it may be rebutted by clear and explicit evidence of actual use in terms of kilometers driven, which is why a log is practically indispensable. [ 90 ] In Chouinard v.

Le Sous-ministre du revenu , [11] Gouin J.C.Q. wrote: [ translation ] [4] At the hearing, the petitioner explained to the Court that his objection was essentially based on the refused expenses for the use of a car, gas, and upkeep, considering that he is self-employed and that he uses the car for work. [5] He also argues that he lost all his documents when he moved to Haiti, making it impossible to file any receipts. [6] The Court acknowledges that such expenses may be claimed by a commission salesman – a self-employed worker – because sections 62 et seq. of the Taxation Act provided that these expenses are admissible under certain conditions. [7] The petitioner, however, has the onus of establishing that these expenses were truly incurred for the amounts claimed and that they are related to his work. [11] Our colleague, Alexandre J.

Lesage, J.C.Q. followed by René Beaulac, J.C.Q., reminds us that the Act is clear: the assessment is presumed to be valid and the onus of proving otherwise is on the taxpayer: [ translation ] On page 7 of his judgment, he writes that it is incumbent on the taxpayer claiming deductions for expenses incurred to pay an income to establish through supporting documentation that these expenses were truly incurred and that they apply to the income earned. In the event of destruction or loss of supporting documents for these expenses, the petitioner still retains the burden of proof.

Furthermore, it has been decided and recognized by case law that the [ translation ] "common sense in accounting and business" approach whereby business income necessarily generates expenses is not enough and that [ translation ] "an approximation or an estimate of the expenses", as presented by the petitioner, cannot be accepted either.

Lesage J.C.Q., added: The expenses must be submitted with supporting accounting documents, which in almost every case constitute the only way for a taxpayer to prove that he or she is entitled to certain deductions. [3] [12] Considering that the petitioner has not discharged his burden of proof and the assessment is presumed to be valid and binding

notwithstanding any error, defect, or omission therein, in accordance with

section 1014 of the Taxation Act (R.S.Q. c. I-3); [ 91 ] Finally, in Chenet v. Deputy Minister of Revenue , [12] Bradley, J.C.Q. wrote: [ translation ] [66] In this respect, it appears from

section 41.0.1 of the T.A. that as soon as the right to use an automobile is recognized, there is a presumption that 12,000 kilometers a year or 1,000 kilometers a month are driven for personal purposes. As this is a presumption, it may be rebutted by clear and explicit evidence of actual use in terms of kilometers driven, which is why a log is practically indispensable to establish the actual kilometers driven for personal purposes. [ 92 ] In this case, the plaintiff had to justify the automobile expenses he wished to deduct from his income with a travel log and supporting documents. He failed to do so.

Consequently, this part of his appeal is dismissed. e. The deductions claimed by the plaintiff for wages paid [ 93 ] In paragraph 35 of his amended motion in appeal, the plaintiff alleges that the defendant should have deducted $35,000 from his gross income as wages paid to his replacement during his holidays. The plaintiff estimates these wages to be about $3,350.00 per year. [ 94 ] On this question, to establish his right to such a deduction, the plaintiff could not merely assert that he had paid certain wages during his holidays.

He had to file the relevant supporting documents into the court record, which he did not do. [ 95 ] In fact, the Court points out that the plaintiff made no mention of wages paid in his accounting books, and he admits that he did not issue any T-4s to his employees, who were not identified and did not testify at the hearing. [ 96 ] In these circumstances, the appeal from the question at issue is dismissed. f. Deductions claimed by the plaintiff for bad debts [ 97 ] At paragraphs 50 and 51 of the amended motion in appeal, the plaintiff alleges: [ translation ] 50.

The gross income calculated from the client records must also take into account the rate of completion of the services rendered by the prostitutes, which was about 80%, and the plaintiff's "bad debts", which amount to 7.5% of his commissions; Indeed, when the plaintiff made a reference and noted it in the client record, about 20% of the time, it was because no service had been rendered as no agreement was reached between the prostitute and the client as to the services to be rendered or the time or place of the meeting, or simply when the client failed to show up to obtain the services. [ 98 ] On this issue, Marie-Josée Caza, auditor for the defendant, declared at the hearing that the amounts crossed out in the plaintiff's client records because of services not rendered were not included in the gross income established in the assessments.

On this subject, she testified more specifically that: [13] [ translation ] 347Q- Just as an aside: what did you do with the amounts that were crossed out on some of the records? How did you treat those crossed out amounts? A- The crossed out amounts were not entered into the Excel file. Anything that was crossed out was not entered. I personally cross- checked this with my sample of three hundred and nine (309) records. THE COURT: 348Q- So, your file and your amounts do not take into account the crossed out amounts. A- Exactly.

Mtre MAURICE RÉGNIER: 349Q- So, there is an example of a crossed out amount on record D-34, dated April 17, 2003. So, the "thirty (30)" appears to be crossed out. A- Therefore, our... 350Q- So that...

A- When the "thirty (30)" was crossed out, it was not accounted for, it was not entered into the Excel file. [ 99 ] That being the case, since it has been shown that the services not rendered by the escorts were struck from the plaintiff's client records and that the defendant did not include them in its calculations of the gross income established in the assessments, there is no reason to deduct them again. [ 100 ] It was up to the plaintiff to establish, with convincing evidence, that some amounts that had not been crossed out were never collected.

On this issue, he did not discharge his burden of proof and even acknowledged that clients always paid save for rare

exceptions, in which case a note was entered on the client record. [ 101 ] On this matter, the plaintiff testified as follows: [14] [ translation ] 1244Q- Yes. When the service was rendered, generally, the clients all paid? A- Yes. 1245Q- Yes. A- Generally. 1246Q- Generally. I imagine that if the client had enjoyed the escort's services and then refused to pay, that would have been a big problem, you know, you would have written it down on the record? A- You mean... yes, that's right, there is the... 1247Q- Pardon me?

A- yes we would have... it would have been noted on the record and we would have blacklisted that client. [ 102 ] With respect to the plaintiff's arguments that 7.5% of the escorts failed to hand over his share of the income, once again, it was up to him to offer convincing proof such as an accounting record or other document to support his testimony on this issue. There is no such evidence here. [ 103 ] Consequently, this aspect of the plaintiff's appeal is dismissed. g. Imposition of the penalty under

section 1049 of the Taxation Act . [ 104 ] The plaintiff maintains that the facts in evidence in this case do not justify imposing the penalty under

section 1049 of the Taxation Act . [ 105 ] For the reasons stated hereinafter, the Court dismisses this ground of appeal put forward by the appellant. [ 106 ]

Section 1049 of the Taxation Act provides: 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 ... [ 107 ] With respect to the application of

section 1049 , the case law has established various criteria to guide the courts called upon to make a decision on the subject. [ 108 ] For example, the Court refers to the judgment rendered in St-Martin v. Quebec (Deputy Minister of Revenue) . [15] In that case, Landry, J.C.Q. wrote: [ translation ] [75] "Gross" negligence is defined as a serious act of negligence, almost intentional, distinct from simple negligence. - Cloutier v. The Queen , [1978] D.T.C. 6485 at 6487. [ translation ] The question is whether the circumstances in which there was a failure to declare are such that a gross fault may be attributed to the taxpayer. Gross fault means

an act of negligence that is relatively serious, difficult to explain and socially unacceptable. - Venne v. The Queen , [1984] D.T.C. 6247 at 6256. …greater neglect than simply a failure to use reasonable care.

It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. [76] Many tests have been developed to assess whether there has been "gross neg ligence" [1] on the part of the taxpayer: (1) the scale of the amounts omitted, the value of the supporting documents provided, and the circumstances in which the omission occurred: omissions of $100,000 or equivalent to 33% of the net income have been declared "significant". (2) the quality of the taxpayer's accounting records : a flawed and inadequate system for the needs usually indicates gross negligence. (3) education, knowledge, and business experience : The taxpayer's knowledge and experience will work against him or her.

(4) were the omissions or misrepresentations in the returns at issue recognized or voluntarily reported? the taxpayer's sincere acknowledgement of the omissions at his or her own initiative rather than following an investigation by thedepartment will work in his or her favour. (5) the nature of the past relationship between the taxpayer and tax authorities (6) the taxpayer's credibility [109] As discussed above, in this case the plaintiff's argument that he was unaware that he had to declare the illegally earned income isimplausible and lacking in credibility. [110] On this subject, the Court summarizes what the evidence has revealed: a. the plaintiff studied for a DEC in business administration with a specialization in finance. b. the plaintiff completed his income tax returns himself over the years, and even worked on contract as an income tax return auditor forRevenu Quebec until 1987. c. the plaintiff went to some lengths to separate his legal income from his illegal income and has even acknowledged that he acted thisway because he feared that the tax authorities would report him to the police. d. after being arrested and pleading guilty to the charges laid against him, the plaintiff did not act of his own volition and voluntarilydeclare all of his legal or illegal income. [111] In light of the evidence as a whole, the Court is of the view that, in all likelihood, the plaintiff failed to declare all of the incomehe earned during the years covered by the assessments at issue. [112] The Court finds that the plaintiff displayed wilful blindness with respect to his tax obligations to be able to subsequently laterjustify, if need be, his failure to declare his illegal income.

There is no [translation] "excusable mistake" here by the plaintiff. [113] On this aspect, in St-Martin v. Quebec (Le ministère du Revenu), Landry, J.C.Q. wrote:[16] [translation] [99] As stated by Marceau, J. in Cloutier v. The Queen[32] on the subject of gross fault, it is...

an act of negligence that is relatively serious, difficult to explain and socially unacceptable. [100] In a tax system based on self-assessment and self-reporting, it is the taxpayer's responsibility to declare any income. While theremay be room for an excusable mistake in some cases, this must not become a habit, because by failing to comply with the law, alltaxpayers are penalized by one taxpayer's failure to declare income or pay taxes. - Succession Clérilda Gagnon v. S.M.R.Q. [1993] R.D.F.Q. 30. [114] Finally, in Biros v. The Queen.[17] Bowman C.J. wrote: Here, the Crown has proved that Mr.

Biros received funds from the banks in furtherance of a fraudulent scheme. He failed to declarethese amounts as income. They are income from a business. (Neeb v. The Queen, 97 DTC 895 at 897; Svidal v. The Queen, (TCC), [1995] 1 C.T.C. 2692). His failure to declare them was misrepresentation. Counsel for the respondent argues that it wasattributable to an indifference and wilfulness. I think it would be disingenuous to attribute the failure to declare income from crime tomere carelessness. It is more likely part of the overall fraud.

I might have surmised that people who earn income from crime do notinadvertently leave it out of their income tax returns. They mean to. [115] That being said, for the above reasons, the Court finds that this part of the plaintiff's appeal must be dismissed and the penaltiesimposed by the department under

section 1049 of the Taxation Act must be maintained. II. Assessment issued under the Act respecting the Québec sales tax a. What is the amount of taxable supplies due pursuant to the Act respecting the Québec sales tax? [116] In light of the facts of this case, regarding the application of the Act respecting the Québec sales tax, without submitting adetailed argument on the question and deferring to [translation] "the Court as to the determination of the taxable nature of prostitutionand/or procuring", the plaintiff argues that he was not required to collect the sales tax on the proceeds of crime.

For the reasons statedbelow, the Court rejects the plaintiff's argument. [117] In addition to the reasons previously stated in relation to the applicability of the Taxation Act to the proceeds of crime, the Courtrefers to the Court of Appeal judgment in Québec (Deputy Minister of Revenue) v. Parent.[18] In that judgment, without having todetermine this particular question, in obiter, Rochette, J.A. for the Court of Appeal addressed the application of the Act respecting theQuébec Sales Tax to the provision of goods or services in the context of drug trafficking. [118] Rochette, J.A. wrote: [translation]

[11] On November 25, 2005, the respondents appealed from the notices of assessment before the Court of Quebec, in accordance with

section 93.1.10 TAA . They seek the cancellation of the notices of assessment because: there was no "supply of an asset" or "supply" within the meaning of the AQST because supply must arise from a valid agreement, which is clearly not the case here;

section 16 AQST does not apply to a drug transaction (for example); nor are the respondents subject to the AQST as a result of

section 422 AQST because the characterization of the relationship of "mandatary" in the context of operations prohibited by criminal laws is absurd. [39] The respondents seek to have the judgments of the Superior Court's deputy-clerk dated February 23, 2005, nullified. While acknowledging that the Court of Quebec has exclusive jurisdiction to rule on the validity of the notices of assessment, they criticize the trial judge for failing to question the appellant's right to obtain judgment under

section 13 AMR . They argue that this supply targets only a [ translation ] "legal supply that rests on a valid agreement", which cannot be the case here. [40] They then characterize as absurd the trial judge's determination that they may be likened to mandataries of the minister within the meaning of

section 422 AQST , in a context where drug trafficking is alleged against them. … [42] It is true that if the respondents did not make a taxable supply within the meaning of the AQST , they were not obliged to collect the tax due by the recipient for this supply as mandatary of the Minister, in accordance with

section 422 AQST . This "obligation", it bears saying, is closely linked to the notices of assessment that assign the respondents a registration number for the QST and accuse them of failing to collect the tax, as they were bound to do. Therefore, the respondents' objections to the notices sent to them should be successful and the notices cancelled. But that is the main question submitted to the Court of Quebec, and the parties agree that it is up to the Court to decide the issue. [43] Indeed, the respondents have made this question a ground of appeal in their proceeding before the Court of Quebec: Also, the subjection of the petitioner to withholding and remitting this tax is the result of

section 422 of the Act , the application of which would be absurd here as it would mean that the Deputy Minister of Revenue had given drug traffickers the mandate of collecting and remitting a tax on drug transactions, when it would be completely impossible for the Deputy Minister to give such a mandate as it would concern operations prohibited under criminal law; [44] In short, the respondents’ status as mandataries will have to be decided by the Court of Quebec in the judgment it will be called upon to render on the merits of the assessments.

But let us pursue this reasoning further. [45] The appellant criticizes the respondents for having acquired and sold a good in the context of a "commercial activity" within the meaning of

section 1 of the AQST , which, strictly from an interpretative standpoint, does not raise a debate if the facts at the root of the involvement of the tax authorities is shown. Similarly, delivering a good is likened to a "supply", which does not pose a problem either.

Finally, a supply made in the context of a commercial activity is a "taxable supply" and the person who makes a taxable supply must collect the tax due by the recipient "as a mandatary of the Minister". [46] At first glance , but without deciding the issue, the application of the AQST to the transactions attributed to the respondents cannot be excluded by a neutral reading of the relevant provisions, which allowed the exceptional performance process under

section 13 AMR to be initiated. [47] Moreover, in 65302 British Columbia Ltd. v. Canada , the Supreme Court stated that tax authorities do not have to take into account the legality of an activity.

Thus, the income of a prostitute or drug dealer may constitute taxable income under the law, and the deduction of expenses incurred with the objective of earning an income from unlawful activities is permitted in the calculation of income. [48] In short, it will be up to the Court of Quebec to decide of the validity of the assessment issued by Revenu Quebec on the merits, in application of the AQST and the AMR , but this assessment does not prima facie appear to be without legal basis. [ 119 ] That said, in Robitaille v.

Quebec (Deputy Minister of Revenue) , [19] after reviewing the relevant provisions of the Act respecting the Québec Sales Tax and referring to the judgment rendered by the Court of Appeal in Parent , [20] Bradley, J.C.Q. found that the provision of drugs is a taxable supply covered by the A ct respecting the Québec Sales Tax . [ 120 ] Bradley, J.C.Q. wrote, among other things: [ translation ] [75] The wording of

section 422 AQST is unambiguous. This provision imposes an unavoidable obligation on any person who makes a taxable supply; as such, this statutory mandate cannot be equated with a contractual mandate governed by the Civil Code of Québec . [76] From the

definitions quoted above, it would appear that the AQST gives quite a broad definition to the concepts of "taxable supply" and "commercial activity" – which form the basis of the supplier's obligation to collect taxes – and makes no distinction as to the legality or illegality of a given activity. [77] Moreover, income earned through illegal trade remains taxable as a business income because the existence of trade entails the operation of a business within the meaning of income tax legislation and because the income derived therefrom constitutes a source of income.

Since the notion of business in this statute is similar to that applicable to income tax matters but covers an even broader range of circumstances, the principle emerging from the case law should also be applied under the AQST scheme. [78] Consequently, if the activity a person engages in can be considered a business, the mere fact that this person is pursuing an illegal purpose has no effect on the application of the AQST . That being so, when a person transfers the possession of drugs to other persons for consideration and on a commercial basis, there is a taxable supply within the meaning of the AQST .

Tax authorities do not have to take into account the legality of an activity.

[79] In Ouellette v. The Queen, the Tax Court of Canada stated the following: [17] This Court has already ruled that income from growing marijuana is taxable income under the Income Tax Act and that marijuanasupplies are "taxable supplies" for the purposes of the Act (see John Molenaar v. The Queen, 2003 TCC 468). It is therefore obvious thatthe same goes for selling all other types of drugs and illegal substances. ... [19] There is no doubt that the activities the appellant engaged in were commercial in nature and that she was making a taxable supplywithin the meaning of the Act.

Thus, she had to collect the tax payable and remit the positive amount of her net tax to the ReceiverGeneral. The fact that a commercial activity is illegal does not mean that a person can avoid the duty imposed on her by tax legislation.Tax authorities do not have to take into account the legality of an activity (see 65302 British Columbia Limited v. Canada, (SCC), [1999] 3 S.C.R. 804, S.C.C.). [80] Similarly, in Deputy Minister of Revenue of Quebec v. Parent, the Court of Appeal stated: [47] Moreover, in 65302 British Columbia Ltd. v.

Canada, the Supreme Court stated that tax authorities do not have to take into accountthe legality of an activity. Thus, the income of a prostitute or drug dealer may constitute taxable income under the law, and the deductionof expenses incurred with the objective of earning an income from unlawful activities is permitted in the calculation of income. [81] Moreover,

section 16 AQST provides that any taxable supply made in Quebec is subject to QST at a rate of 7.5% unless it isconsidered a zero-rated supply, in which case the QST rate is 0%. [86] As for the term "property", it is defined in

section 1 AQST as follows: 1. "property" does not include money. [87] In La collection fiscale du Québec – taxes à la consommation – 2007, the authors write the following concerning the term"property": 64-805: This term necessarily includes all property except money. Whatever the nature of the property, it remains property. For example,property may be movable, immovable, tangible property, or intangible property.

In general, for the QST to apply, there must be, a priori,a taxable supply of a property or a service. [88] Thus, for the purposes of the application of the AQST, there is no property that is not an object of commerce due to illegality orpublic policy. [90] In conclusion, the Court is of the view that supplies of drugs, such as the supply of cocaine, constitute taxable supplies within themeaning of the AQST. [121] The Court agrees with Bradley, J.C.Q. [122] Moreover, the plaintiff argues that the escorts to whom he referred clients were self-employed, not employees.

As such, heargues that the tax he owes to the defendant under the Act respecting the Québec Sales Tax must be calculated only according to the 25%"commission" he received for each transaction, rather than the total amount the clients paid the escorts. [123] For its part, the defendant argues that the plaintiff's agency (the Hot Boys agency) supplied a single prostitution service to itsclients and that the escorts were the plaintiff's mandataries for the collection and remittance of the sales tax.

It argues that the escortswere not self-employed. [124] In this case, the relevant provisions of the Act respecting the Québec Sales Tax are: 1.

For the purposes of this Title and the regulations made under it, unless the context indicates otherwise, “recipient” of a supply of property or a service means (1) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement topay that consideration, (2) where paragraph 1 does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, “commercial activity” of a person means (1) a business carried on by the person, other than a business carried on without a reasonable expectation of profit by an individual, apersonal trust or a partnership, all of the members of which are individuals, except to the extent to which the business involves themaking of exempt supplies by the person, ... “consideration” includes any amount that is payable for a supply by operation of law; ... “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking isengaged in for profit or not, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of

lease, licence or similar arrangement, but does not include an office or employment; ... “ supplier ”, in respect of a supply, means the person making the supply; “ supply ” means the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, lease, gift or alienation; “ taxable supply ” means a supply that is made in the course of a commercial activity; ... 16. Every recipient of a taxable supply made in Québec shall pay to the Minister of Revenue a tax in respect of the supply calculated at the rate of 9.975% on the value of the consideration for the supply. ... 422.

Every person who makes a taxable supply shall, as a mandatary of the Minister, collect the tax payable by the recipient under

section 16 in respect of the supply. » [ 125 ] In its factum, the defendant submits that the issue here is the following: [ translation ] The issue is in fact the following: Did the Hot Boys agency supply a single prostitution service to its clients and, if so, were the prostitutes Mr. Catudal's mandataries to collect the payment of the consideration and subsequently remit it to him? In other words, were the prostitutes acting on behalf of the Hot Boys agency or on their own behalf? [ 126 ] In Maltais v.

R. , [21] Lamarre-Proulx J. of the Tax Court of Canada, upon hearing a similar case, asked and answered the question at issue as follows: [5] The Minister of National Revenue ("the Minister") is of the opinion that the workers are employees. The Appellant argues that they are self-employed workers. This is the issue that I must settle, although I am not convinced that it is the right issue. [6] In my view, the issue should have been whether there was a single consideration or separate considerations. A business can supply its services through employees or through self-employed workers.

That does not alter the nature of the business as a supplier of services. It is the nature of the operation that must be considered. Is it an operation in which services can usefully be acquired separately? As purchasers of services, the clients paid the massage parlour a single amount. That amount was set by the Appellant for the services of the massage parlour. As the owner and operator of the massage parlour, the Appellant was, in my view, the supplier of the services for which the clients paid a single consideration. [ 127 ] In Manship Holdings Ltd. v.

R. , [22] the Federal Court of Appeal, per Noël, J.A., addressed the issue in essentially the same manner. He wrote: [2] The fact that the masseuses were independent contractors rather than employees does not preclude a finding that they performed their services on behalf of the appellant. The question in this regard is whether the masseuses, as self-employed persons, supplied their services in their own name or as agents of the appellant?

If the services were provided as agents, the appellant is the sole provider of these services and is responsible for the collection and remittance of the HST on the full amount paid by the customers. [ 128 ] In this case, the evidence reveals that the escorts answered the plaintiff's call to go to the residence of a client who had called him to obtain the services of an escort. [ 129 ] In this respect, the evidence has revealed, inter alia , that: a. it was the plaintiff who, on behalf of the Hot Boys agency, set the prices of various prostitution services, which could vary depending on what was required from the escort; b. advertising for the plaintiff's agency was always paid for by the plaintiff on behalf of the escorts or in their name. c. the telephone number was the agency’s, never the escorts’, and the client always had to go through the agency to secure the prostitution services; d. in its ads, the plaintiff's agency recruited escorts by indicating [ translation ] "now hiring", as appears from exhibit D-31; e. the decision to hire an escort rested solely with the plaintiff. [ 130 ] In the Court's view, the facts of this case reveal that the plaintiff's role is much greater than a mere dispatcher, as he implied during his testimony. [ 131 ] In this respect, it is sufficient to recall that it was the plaintiff who chose which escort the agency would offer and that, to be able to make an informed choice, he had met the candidates, noted their measurements and physical appearance, and hired them.

It was also the plaintiff who determined the escorts' rates. [ 132 ] Taking the above into account, the Court refers to the Federal Court of Appeal judgment in Manship Holdings Ltd. v. R. [23]

where it was found that the masseuses involved were not acting on their own behalf but on behalf of the massage parlour, and that it was therefore the parlour's responsibility to collect the taxes on the services supplied. [ 133 ] Specifically, in that case, Noël, J.A. wrote: [5] Once a customer had chosen the service to be provided, payment was made in cash and the money was handed by the masseuses over to the on site manager. In 2002 time cards were introduced. The appellant would collect its flat rate on the basis of those time cards (reasons, para. 15).

The appellant calculated the HST on the total rate charged for the massage and paid it out of its half of the fees collected (reasons, para. 5). [6] This monetary arrangement between the appellant and the masseuses supports the conclusion that the masseuses, when providing their services within the appellant’s premises, were acting for the appellant rather than in their own name. Significantly, they had no say in the determination of the rate set by the appellant for the services which they performed as self-employed persons and were not at liberty to charge more than the set rate.

The appellant, as the person responsible for the payment of the HST, had to be aware of the amounts actually paid for the services. These are clear indications that the masseuses were not acting in their own name. [7] Equally significant is the Tax Court judge’s finding that the parlours were single purpose facilities (reasons, para. 35): ... customers would not come to the appellant were it not for the massage services being offered. From a business standpoint, the appellant supplies a massage parlour service, one element of which is to provide the premises.

It follows that from a customer’s perspective, the contractual relationship was with the appellant and not the masseuses. This is consistent with the view that the masseuses were not acting in their own name but for the appellant. [8] It is also worth emphasizing that for HST purposes, the appellant and the masseuses were acting on the basis that the masseuses were engaged pursuant to a contract of services, a relationship from which agency naturally flows.

The fact that the masseuses were found to be self-employed alters the capacity in which they rendered their services, but it does not alter the fact that these services were rendered in the course of the appellant’s business. [ 134 ] In addition to the above, the Court notes that the plaintiff pleaded guilty to six (6) counts laid against him under paragraph 212(1) (

h) of the Criminal Code and was sentenced to a forty-month prison sentence. [ 135 ] One of these counts (exhibit D-20) stated: [ translation ] 4- Between August 1, 2003, and August 31, 2003, in Montreal, District of Montreal, did, for the purposes of gain, exercise control, direction or influence over the movements of J.C. (86-09-06) in such manner as to show that he was aiding, abetting or compelling that person to engage in or carry on prostitution, thereby committing an indictable offence under paragraph 212(1) (

h) of the Criminal Code . [ 136 ] Regarding the definition of the notion of control within the meaning of paragraph 212(1) (

h) of the Criminal Code , in Perreault v. R , [24] the Court of Appeal stated: [ translation ] The evidence assessed by the trial judge clearly reveals, however, that the appellant directed the movements of the young girls, within the meaning of paragraph 212(1)(

h) of the Cr. C . He was the owner and directing mind of the agency. He placed the ads in the newspaper to recruit clients. He assessed the clients' tastes and selected the candidate who, in his view, best met the client's wishes. He provided the young girls with outfits he deemed appropriate for their duties. He imposed rules to follow

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