2022 QCCQ 8066, 2022 QCCQ 8066

Wang c. Agence du revenu du Québec 2022 QCCQ 8066 COURT OF QUÉBEC Administrative and Appellate Division CANADA PROVINCE OF QUÉBEC DISTRICT OF MONTREAL TOWN OF MONTREAL Civil Division No: 500-80-037488-187 500-80-037489-185 DATE: NOVEMBER 9, 2022 ______________________________________________________________________ PRESIDED BY THE HONOURABLE DAVID L. CAMERON, J.C.Q. ______________________________________________________________________ LONG WANG (500-22-037488-187) -and- CANADA YAWOW INTERNATIONAL INC. (500-80-037489-185) Plaintiffs v.

L’AGENCE DU REVENU DU QUÉBEC Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] The Plaintiffs, Mr. Long Wang and the corporation of which he is the principal, Canada Yawow International Inc. (“Yawow”), contest new notices of assessment issued by the Defendant (the “ARQ”) for the fiscal years 2012 through 2015. The table below sets out the new assessments showing the relevant dates and amounts assessed: Canada Yawow inc.

Date of year end Date of the notice Notice number Amount due 31 oct. 2012 25 août 2017 1044 16 125,67 $ 31 oct. 2013 25 août 2017 1045 22 473,34 $ 31 oct. 2014 25 août 2017 1046 24 126,08 $ 31 oct. 2015 25 août 2017 1047 5 026,12 $ Long Wang Fiscal year Date of the notice Notice number Amount due 2012 12 septembre 2017 MU630767C01 54 184,60 $ 2013 12 septembre 2017 MW582320C01 91 679,64 $ 2014 12 septembre 2017 MW610978C01 41 826,83 $ [ 2 ] The amounts of income forming the basis of these assessments were derived by the ARQ from a net-worth assessment carried out by an auditor of the Canada Revenue Agency (“CRA”) in regard to the income-tax position of the Plaintiff, Mr.

Wang. The hypothesis retained was that he had failed to report income in the relevant years as follows:

Undeclared Revenue as per Net Worth Analysis (P) 31-12-2012 31-12-2013 31-12-2014 Total $130,084 $ 217,521 $.109,366 $456,971 [ 3 ] The income attributed to Mr.

Wang was then used to ascertain presumptively the undeclared sales of the corporation, on the assumption that it was through the corporation’s business that this additional income was channelled. [ 4 ] Because the individual and the corporation have different year-ends for accounting purposes, the spreading of the income over the fiscal calendar years is different in the two cases. [ 5 ] It is also important to note that the reassessments were carried out within the critical three-year period except, in respect of one year, 2012.

For the subsequent years, there was no issue of the assessments being time barred. [ 6 ] The auditor acting for the CRA, Alex-Vickey L’Homme, was the essential witness for the ARQ, the latter having based all of its hypotheses for the purpose of its own new assessments on her work done for the CRA. The only evidence of substance provided by the ARQ was the audit documents prepared by this witness and her testimony given at trial.

The ARQ witnesses testified as a question of form, explaining how they had simply adopted the CRA’s findings in their own new assessments. [ 7 ] The parties engaged in exchanges of information and held discussions after the termination of the pre-trial discovery stage which resulted in the auditor modifying her findings. These discussions were treated by the ARQ as indicating that a settlement of the files had been reached. The ARQ, relying on there being a settlement de-assigned its witnesses. On the eve of trial, however, Mr.

Wang repudiated the settlement and disavowed the attorney. [ 8 ] This situation presented something of a crisis for the ARQ because Mr. Wang wished to continue the trial as planned. The Court held a case-management conference on May 9, 2022, during which it was agreed that Mr. Wang would continue the case on his own. He could not represent the corporation; he could only self-represent in his own right.

Given that the evidence in his personal case was the same as the evidence in the Corporation’s case and the two cases were joined for trial and judgment, it was decided that the case could continue on the merits without the Corporation seeking a new attorney. Its position in the matter was passive, but the outcome would be determined by the same proof as that adduced in Mr. Wang’s case. [ 9 ] All parties agreed to this arrangement in the presence of the Defendant’s attorney of record before he was allowed to cease representing.

Thus, the Court could determine that the judicial contract was binding on the corporate Defendant as well as on the ARQ. The case proceeded beginning the next day and was taken under advisement after the closure of proof and argument on May 13, 2022. [ 10 ] Prior to the closing of the ARQ’s evidence, the auditor confirmed in her testimony that the reassessments should be modified to take into account the elements she had been ready to concede as a result of the discussions. Part of these concessions concerned certain deposits resulting from loans and the recognition of business expenses paid by Mr.

Wang as shareholder, to name a few of the most significant of them. [ 11 ] The new computation proposed by the auditor is as set out in the table below: 31-12-2012 31-12-2013 31-12-2014 Total Undeclared Revenue as per Net Worth Analysis (P) $ 84,046 $ 133,860 $ 88,926 $ 306,832 [ 12 ] This computation was fleshed out in a spreadsheet produced as D-11 showing the key items, but not all the items conceded. [ 13 ] The difference of roughly $ 150,000 of imputed income is significant for the computation of tax, interest and penalties, and this is compounded by the fact that the CRA intends to proceed on the basis of its revised reassessment as well. [ 14 ] The taxpayers assert however that the amounts they declared to the ARQ are substantially correct.

They do not accept a reassessment based on these revised calculations nor any other calculation of income beyond what was declared. [ 15 ] It becomes necessary therefore to deal with the questions in issue. General principles [ 16 ] Any assessment creates a presumption of validity pursuant to the Taxation Act [1] if it is made within the powers of the ARQ: 1014.

An assessment shall, subject to being varied or vacated on an objection, contestation or appeal and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding relating thereto. However, where a court vacates an assessment on the ground that it has been issued beyond the period during which the Minister may reassess or make an additional assessment under any of paragraphs a to a .2 of subsection 2 of

section 1010, as the case may be, the assessment replaced by the assessment so vacated remains valid and binding, but any time prescribed by a fiscal law and applicable in regard thereto begins to run from the date of the judgment vacating the last assessment.

[ 17 ] The Minister may determine (initially) the tax interest and penalties at any time pursuant to

article 1010.1. of the T.A. Once this is done, the Minister’s powers to redetermine or, according to the usual term “reassess” depend upon conditions, such as those pertaining to time. Pursuant to

article 1010.2 (a): 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 notice 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; [ 18 ] In this file the reassessments for the years 2013 and following fall under this three-year limitation and are therefore valid. [ 19 ] For 2012, which is outside the three years, the ARQ relies upon 1010.2. (b) (

i) of the T.A. whereby the Minister may reassess:

b) at any time, if the taxpayer or the person who filed the return i. has made a misrepresentation that is attributable to negligence or wilful default or has committed any fraud in filing the return or in supplying any information provided for in this Part, [ 20 ] The result of the interaction of these provisions concerning Ministerial power to reassess and the general notion of presumed validity of

article 1014 can be summarised as follows: when the Minister is reassessing outside the three-year limit [2] , the ARQ has the burden of proving one of the elements under 1010.2. (b) (

i) of the T.A. If it meets this burden of proof, then the assessment is presumed valid, and the taxpayer has the burden of proving that it is not representative of the income-tax position. [ 21 ] In the case of any assessment that is presumed valid, the taxpayer has the burden of proving against the presumption. Thus, the hypotheses that the Minister has retained from the audit will be deemed valid unless the taxpayer fulfills this burden of proof.

In the case that the burden is not met by evidence having probative value, the assessment establishes the tax owing [3] . [ 22 ] Interest is simply a mathematical computation. [ 23 ] Penalties are not presumed valid: The ARQ has the burden of proof of the elements that permit the imposition of penalties [4] .

Article 1049 of the T.A. makes this dependent upon proof of elements of fraud or gross negligence: 1049. Every person who, knowingly or under circumstances amounting to gross negligence, has made or has participated in or acquiesced in the making of, a false statement or omission in a return, certificate, statement or answer, in this

section referred to as a “return” , made or filed in respect of a taxation year for the purposes of this Act, incurs a penalty equal to the greater of $100 and 50% of the amount by which […] [ 24 ] In cases where the ARQ is basing its hypotheses on an indirect method of assessment, such as a net-worth assessment of the individual, as is the case here, the jurisprudence tends to impose an onus on the ARQ to establish its justification for resorting to such a method [5] , which is thought of as a last resort, and to follow a proper methodology in the use of the method chosen.

In this way, the presumption of validity is somewhat qualified, and the joinder of issue on this point begins with the proof by the ARQ of the facts that led to the decision to adopt the indirect method and the manner in which it was carried out. Issues [6] [ 25 ] The issues can therefore be summarised by the following questions: 1. For the year 2012, did the ARQ prove an element as required of misrepresentation attributable to negligence or wilful default or the commission of any fraud? 2.

For the years 2013, 2014 and 2015, in any case, and, in the event the answer to the first question is affirmative in respect of 2012: Did the ARQ demonstrate the necessity of using an indirect method of assessment and the appropriateness of the method chosen? 3. If so, did the taxpayer fulfil the burden of proving that the amounts of income actually declared were accurate? 4. For any amounts of additional tax owing, did the ARQ show an element of falsity as required by

article 1049? [ 26 ] Turning to these questions, the Court will briefly speak of the factual context, and then turn to the contestation of the issues listed above. Essential facts [ 27 ] Mr. Wang is the sole shareholder of CANADA YAWOW INTERNATIONAL INC. and the sole person responsible for administration. The business was established in 2011. [ 28 ] The business of Yawow is to purchase seafood as a raw material, mostly a product known as “sea cucumbers” fished in the Maritimes and to dry the produce, package and distribute it in Canada and export it for the Chinese market.

The product is acquired from various fishery sources in Atlantic Canada. [ 29 ] The drying of some of the product is done by a supplier in the Maritimes. Drying of products acquired in frozen form is done in a small facility operated by Yawow. The facility was set up in St-Hubert initially in 2011. At times relevant to the audit, the

transformation was carried out at a processing plant in Brossard, Québec. [ 30 ] The auditor was assigned the file in October 2015 as she was joining the CRA’s unit in Brossard. She was hired to carry out audits in the “underground economy/économie clandestine” unit. [ 31 ] This term does not relate to investigations into criminal activity: it is more a question of businesses that lack proper books and records and are candidates for audits using an alternative method. Issues Question 2 .

For the years 2013, 2014 and 2015, in any case, and, in the event the answer to the first question is affirmative in respect of 2012: Did the ARQ demonstrate the necessity of using an indirect method of assessment and the appropriateness of the method chosen? [ 32 ] The auditor points to several justifications for using an IVI. • Insufficient income as declared by the shareholder and his spouse to establish the debt owed to him according to the financial statements for shareholder loans to the corporation. • Very high maintenance and repair costs claimed as an expense.

The auditor suspected that these should have been capitalised. • Inadequate accounting records and significant discrepancies between the accounting records and the amounts declared as income of the corporation. [ 33 ] In his testimony, Mr. Wang admits readily that his accounting was insufficient. He explains that he paid only a minimal amount for bookkeeping and provided whatever information he could to the accountants preparing the income-tax returns, but he had no knowledge of accounting and the financial documents were “a mess”. [ 34 ] This lax approach to accounting may have had something to do with Mr.

Wang’s earlier experience in business: owning and operating a restaurant. That context is different because of the accounting black box installed in every restaurant for sales tax accounting. Absent any fraud, this type of system provides readily a record of sales on a daily basis which can provide significant insight into the business’ profit and loss. [ 35 ] The present matter is different: the business was partially carried out on a cash basis and Mr. Wang admitted to the auditor that he paid some wages in cash. There was no objective way of establishing the volumes of products processed.

The question then becomes: how much cash was circulating in this manner? [ 36 ] Mr. Wang made the point that it should be an easy matter to verify with the fishery authorities because the sea cucumbers that he purchased are sold within a regulatory environment. He stated that it would be a simple matter for the auditor to verify his purchases through information available from the regulatory authority. Ironically, he did not produce any evidence to support this, neither the details of the regulatory control on purchases, nor the availability of such data, if it indeed exists.

By raising the argument that the auditor could have obtained such data, and then failing to produce it himself, Mr. Wang added to the credibility of the audit process and acted against his own credibility. If such data exists and is available, why did he not provide the auditor the means of obtaining it? [ 37 ] As well, although this is not the determining factor, Mr. Wang was not helpful in that he provided only fragmentary bank records. This was part of a consistent pattern of non-collaboration.

The auditor had to proceed to compel the documents from the financial institutions through formal demands. [ 38 ] Thus, the auditor turned, as a last resort, to the alterative mode of audit. [ 39 ] The auditor opted for an analysis of the net worth of the shareholder, Mr. Wang, while at the same time considering aspects of the profit and loss of the Corporation. In the final concessions she made, for example, she considered certain costs assumed by Mr.

Wang as constituting “Identified business expenses paid by the shareholder”. (D-11) [ 40 ] She adopted the net-worth analysis because of what she found in the shareholder loans ledgers of the corporation. [ 41 ] On the basis of the balances owing to him, which could not be justified by virtue of his declared income, she generated the hypotheses based on undeclared income. Since he had no identifiable business or employment income except that which would come from the enterprise operated by YAWOW, she generated the hypothesis that this income was earned by the later and appropriated by Mr.

Wang. [ 42 ] In carrying out an analysis of the shareholder loan ledger, she had to make certain suppositions and when there was more than one way of deriving values from conflicting sources, she gave preference to information found in declarations signed by Mr.

Wang, as opposed to values in documents he did not prepare or endorse himself. [ 43 ] In all respects, her testimony showed that she had done her analysis with diligence, and her approach was fair minded. [ 44 ] Given that there were various ways to explain and interpret these numbers, it would have been open to the taxpayers to present accounting evidence to contradict the hypotheses. This was not done. When she was questioned in chief, her explanations were credible, and when she was submitted to questions by Mr. Wang in cross-examination, her credibility was enhanced.

She showed a mastery of the financial data and had exact sources to back up her answers to any and all queries.

Question 3. Did the taxpayer fulfill the burden of proving that the amount of income actually declared were accurate? [ 45 ] The evidence of the taxpayer dealt to a large extent with loans he had arranged for the business. The testimony from M. Hongjun Guo [ 46 ] The figures given by Mr. Hongjun Guo, to the extent that it could be proved that Mr. Wang had receipts from this individual and had transferred them to the company were considered by the auditor as loans in her analysis. Therefore, these amounts, having been taken into account, where not a live issue at trial.

The testimony of Liu Wei [ 47 ] In respect to another individual, Ms. Liu Wei, the evidence shows that she was indicated as a client of Yawow in documents submitted in the audit. She testified having lent $30 000 and that the money was reimbursed by monthly instalments from Mr. Wang’s personal line of credit. Although it would have been possible for the Court to doubt whether the amounts were not payments for the sale of products by the corporation, in the analysis, the auditor accepted that a loan had been given.

Since it was received by the corporation itself, she made an adjustment in the calculations called “ajustement fiscal” such as these injections of money did not have an impact on the net worth assessment of Mr. Wang. [ 48 ] On the whole, the evidence establishes that the auditor traced these amounts and applied them accurately to the financial analysis. Gifts [ 49 ] There were also valid treatment of gifts from Jingjin Fan, substantial amounts which went into the concessions made by the auditor set out in exhibit D-11.

A general attempt to raise doubt [ 50 ] Apart from these considerations concerning injections of money through loans or gifts, the rest of the evidence given by Mr. Wang consisted in an attempt to rectify certain aspects of the auditor’s work. [ 51 ] His attempts to re-establish the numbers were entirely unsuccessful.

He had neither the knowledge of the business’s finances nor the knowledge of accounting principles required to make any credible contribution to the factual issues in the case. [ 52 ] When he challenged in cross-examination of the auditor, he simply boosted her credibility by giving her the opportunity to give more complete and elaborate explanations on how she had carried out her analysis. [ 53 ] It is difficult to write very much about the Plaintiff’s evidence in this case except to say that it is tantamount to an absence of any credible evidence having probative value to upset the presumption of validity established by the assessments based on the auditor’s hypotheses. [ 54 ] Therefore, the Court concludes that the taxpayers did not fulfill their burden of proving that the amounts actually declared were accurate. [ 55 ] If anything, the exercise of litigation has given the taxpayers the opportunities to benefit from ample discussion between their professionals and the auditor, which resulted, in a substantial reduction of the amount of undisclosed income assessed including the recognition of substantial expenses she had not allowed initially explained.

Question 1: For the year 2012, did the ARQ prove an element as required of misrepresentation attributable to negligence or wilful default or the commission of any fraud? [ 56 ] It is irresistible to use the misnomer “prescription”. As explicated above, it is a question of the Minister’s power to assess which is predicated on the ARQ proving () element. Without this proof, time bars the Minister’s power. [ 57 ] The ARQ has the burden of proof on the element set out in

article 1010.2 (b) (

i) T.A. In this case a misrepresentation attributable to negligence or wilful default. [ 58 ] The taxpayer’s testimony was very clear and candid that his corporation’s accounting was a mess. When the auditor detected a discrepancy between elements declared in the corporate and personal income- tax returns and the accounting data she was able to compile. It is obvious that there was a misrepresentation attributable to negligence or wilful defect. The federal and Quebec declarations were made on the same primary material and the declarations were materially the same.

Discrepancy existed in all the years to which the audit applied including 2012. The Minister therefore had the power to assess for fiscal 2012. The individual and the corporation are both subject to this power, because the individual was the directing mind of the corporation. Question 4. For any amounts of additional tax owing, did the ARQ show an element of falsity as required by

article 1049?

[ 59 ] Penalties were assessed pursuant to art. 1049 which depends upon knowledge on the part of the taxpayer of the falsity of a statement of or of an omission that the circumstances amounted to gross negligence. [ 60 ] This is a substantially more difficult test that is the case of the so-called “prescription” issue referred to above. Here, it is not necessary for the Court to find knowledge on the part of Mr. Wang. His lack of knowledge was a form of a wilful blindness.

He carried out his business activities with a total disregard for his obligations and those of the corporation to maintain proper records as provided at articles 34 and 35.1 of the Tax Administration Act [7] . He could not plead the case that he had relied reasonably on competent persons to carry out his responsibilities in a delegated manner. The amounts of money the corporation devoted to bookkeeping and accounting was minimal, and he readily accepts this in his testimony as being inadequate.

He signed the income tax returns with a sort of blind faith that the incomplete data he had provided had been transformed in the proper financial disclosure. [ 61 ] At best, his reliance, if any on this process, shows disingenuity tantamount to a flagrant disregard. The ARQ points out rightly, that the penalties imposed are justified in light of the numerous years of experience of the Plaintiff, the substantial amounts not declared, the repetition of the omission over several years and the very inadequate accounting. [ 62 ] The ARQ has met its burden in this regard.

BY THESE REASONS, THE COURT In case number 500-22-037488 (Long Wang): VACATES the notices of assessment MU630767C01 (2012), MW582320C01 (2013) and MW610978C01 (2014). RETURNS the matter to the Minister for reassessment for tax, interest and penalties taking into account the revised “Undeclared Revenue as per Net Worth Analysis in conformity with the amounts set out above in paragraph 11, in the applicable years, and, for more precision and detail on these values, applying adjustments submitted by the auditor under the heading “Concessions” (2022-05-11) totalling $ 306 832 in exhibit D-11.

WITH COSTS in favour of the ARQ. In case number 500-80-037489-185 (Canada Yawow International Inc.): VACATES the notices of assessment 1044 (2012), 1045 (2013), 1046 (2014) and 1047 (2015). RETURNS the matter to the Minister for reassessment for tax, interest and penalties taking into account the revised “Undeclared Revenue as per Net Worth Analysis in conformity with the amounts set out above in paragraph 11, in the applicable years, and, for more precision and detail on these values, applying adjustments submitted by the auditor under the heading “Concessions” (2022-05-11) totalling $ 306 832 in exhibit D-11.

WITH COSTS in favour of the ARQ. . __________________________________ David L. Cameron, J.C.Q. LONG WANG Self-represented CANADA YAWOW INTERNATIONAL INC. Not represented Me Chantale Paris Me Marie-Claude Leclerc LARIVIÈRE MEUNIER (REVENU QUÉBEC) Attorney for the Respondent Dates of hearing: May 9,10,11,12 and 13, 2022 [1] CQLR c. I-3 “Taxation Act (“T.A.”)