2019 QCCQ 5233, 2019 QCCQ 5233

Translated from the original French Leroux c. Agence du revenu du Québec 2019 QCCQ 5233 COURT OF QUEBEC (Administrative and Appeal Division) CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL “Civil Division” No.: 500-80-029853-141 500-80-029854-149 DATE: August 2, 2019 ______________________________________________________________________ PRESIDING: THE HONOURABLE DANIEL BOURGEOIS, J.C.Q. ______________________________________________________________________ Jacques LEROUX Plaintiff v.

AGENCE DU REVENU DU QUÉBEC Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ INTRODUCTION [ 1 ] These are appeals brought by Jacques Leroux (“Leroux”) [1] from notices of assessment established under the Quebec Taxation Act [2] (the “ Act ”) (500-80-029853-141) and under the Act respecting the Québec sales tax [3] (“ AQST ”) (500-80-029854-149). [ 2 ] The notices of assessment issued under the Act concern the 2004–2008 taxation years.

It is not disputed that the defendant, the Agence du revenu du Québec (“ARQ”), issued certain notices of assessment beyond the normal reassessment period for the years 2004, 2005, and 2006, and that penalties were also imposed for all the years at issue. [ 3 ] The notices of assessment in dispute, all issued on September 22, 2010, are: MR65915C02 for 2004 (D-1), MP117424C01 for 2005 (D-2), MS728712C01 for 2006 (D-3), MN203410C01 for 2007 (D-4), and MP778512C01 for 2008 (D-5). [ 4 ] These notices of assessment result from police information sent by the Terrebonne police department and the Sûreté du Québec. [ 5 ] In the context of Operation “Éclair”, led jointly by the Sûreté du Québec, the Royal Canadian Mounted Police, and Hydro- Québec, searches were carried out in 29 cannabis greenhouses, resulting in 25 arrests. [ 6 ] With respect to the plaintiff, searches were performed on May 20, 2008, in two buildings that he co-owned, that is, a residence located at [address 1] (“[A Street]”) and another located at [address 2] (“[B Street]”), in La Plaine. [ 7 ] After analyzing the file and taking into account information received from the police authorities, the ARQ deemed that Leroux had failed to report income he received from the cannabis business, as more fully described below (para. 25 of the defence): 2005 2006 2007 2008 TOTAL Income from the production of cannabis $828,563 $990,563 $990,563 $330,188 $3,139,877 [ 8 ] Moreover, the ARQ also refused certain expenses between 2004 and 2008 totalling $301,559, as broken down below (para. 26 of the defence): 2004 2005 2006 2007 2008 TOTAL Refused expenses $13,719 $64,560 $126,473 $48,442 $48,366 $301,559 [ 9 ] Penalties in the amount of $415,079.44 were also imposed.

These penalties result from both the expenses refused and the unreported income from the sale of cannabis. [ 10 ] With regard to the AQST file, on August 20, 2010, the ARQ issued a notice of assessment bearing number 9205031 for the period from January 1, 2004, to December 31, 2008.

[ 11 ] As appears from that notice of assessment, the amounts assessed are: Duties $17,820.47 Penalties $10,981.53 Interest $6,009.32 TOTAL $34,811.32 [ 12 ] With regard to the assessed duties of $17,820.47, an amount of $2,407 refers to sales tax that was uncollected (or uncollectable) by the plaintiff following the January 29, 2004, purchase of a building at [address 3], in the village of Saint-Côme. [ 13 ] Also, an amount of $15,413.47 concerns the input tax refund (ITR) claimed by the plaintiff following the purchase of the Saint- Côme building.

CRIMINAL RECORD [ 14 ] In July 2008, Leroux appeared on charges of possession of cannabis for the purpose of trafficking under s. 5(2) and s. 5(3) (

a) of the Controlled Drugs and Substances Act [4] and of production of cannabis under s. 7(1) and s. 7(2)(

b) of that same statute. [ 15 ] On June 19, 2013, Leroux pleaded guilty to the charges under s. 5(2) and s. 5(3) of the Controlled Drugs and Subtances Act , that is, having had in his possession, for the purpose of trafficking, any substance included in Schedules I, II, III, IV, or V, of the statute (P-9). The other charges were dropped. [ 16 ] The guilty plea was entered pursuant to s. 355 (

a) of the Criminal Code , [5] which indicates that every one who commits the indictable offence in question, that is, possession and trafficking, if the value is more than five thousand dollars, is liable to imprisonment for a term of not more than ten years. ADMISSIONS AS TO CERTAIN AMOUNTS DURING THE HEARING [ 17 ] The ARQ admitted at the hearing that the amounts refunded by Leroux to Laurette Sioui, his mother-in-law, are no longer at issue.

These amounts are $13,718.75 for 2004, $15,737.50 for 2005, and $2,518.75 for 2006, for a total of $31,875. [ 18 ] Also, the ARQ no longer contests the following additional expenses raised in the income tax file, that is, $5,430 for 2005, $66,446.78 for 2006, $11,250.52 for 2007, and $13,323.33 for 2008, for a total of $98,450.63. [ 19 ] Thus, in light of the above, only the following expenses, which were refused during the audit, are still at issue, in addition, of course, to the income alleged to come from the production of cannabis, which is discussed in paragraph 7 of this judgment: 2004 2005 2006 2007 2008 Refused expenses $0 $43,392.50 $55,507.47 $37,191.48 $35,042.67 BACKGROUND [ 20 ] For the years at issue, the plaintiff operated a transport and trucking company. [ 21 ] As admitted in the originating application, Leroux had several rental buildings that he owned or co-owned with his wife, Diane Sioui (“Sioui”), or his son, Marco Leroux (“Marco”) (P-4 and D-10). [ 22 ] In addition to the family home he built in 1994, the evidence, which is uncontradicted on this point, reveals that Leroux owned or co-owned the following buildings: Properties Date of purchase [address 3], Saint-Côme 2004 [address 4], Mascouche 2000 [address 5], La Plaine 2003 [address 2], La Plaine 2004 [address 1], La Plaine 2005 [address 6], La Plaine 2005 [address 7], Mascouche 2006 [address 8], La Plaine 2008 [address 9], La Plaine 2007 [address 10], La Plaine 2007 [ 23 ] As specified in the audit report (D-10 at 17, 18, and 19), some of these buildings were purchased without hypothecary financing (the building on road [C], in Saint-Côme, and the building at [address 5], in La Plaine), whereas for others, he obtained hypothecary financing. [ 24 ] The total (net) income reported by Leroux and Sioui for the years at issue is:

2004 2005 2006 2007 2008 TOTAL Leroux $15,942 $27,944 $42,340 $43,723 $26,389 $156,338 Sioui $4,653 $3,298 $6,124 $10,765 $4,807 $29,647 [ 25 ] With regard to the income tax file, in addition to arguing that the notices of assessment for 2004 to 2006, inclusively, are prescribed, the plaintiff alleges the following (amended application dated December 22, 2017): [ translation ] 10. The plaintiff never received unreported income; 11. In fact, for the years at issue, the plaintiff did not produce cannabis, harvest the plants, or sell cannabis as the defendant alleges; 12.

Thus, the plaintiff cannot have earned the additional income assessed by the defendant: … 17. The defendant’s conclusion that, for the years at issue, the plaintiff failed to report the additional income is based on an investigation carried out by the Terrebonne police, which led to searches in May 2008 in two of the plaintiff’s properties, that is, those located at [address 1] and [address 2], in Terrebonne; 18.

Based on the information available in the police report and other documents, the defendant’s auditor erroneously extrapolated that, as the owner of the homes searched where cannabis plants were found, the plaintiff had a commercial operation selling cannabis; … 21. In fact, the properties searched were rented to tenants; … 27. Moreover, the audit method used by the defendant is an alternative indirect method based on a projection method that, itself, is based on hypothetical harvests of cannabis; 28.

The plaintiff argues that this way of determining unreported income is not only arbitrary, but also exaggerated, inaccurate, and unrepresentative of reality; 29. Also, the indirect method should only be used as a last resort when the information and records provided by a taxpayer are incomplete, which was not the case here; 30.

The plaintiff submits that, for the years at issue, there is no evidence that he produced cannabis, harvested the plants, or sold cannabis, as the defendant alleges; [ 26 ] With respect to the QST file, the plaintiff alleges the following (amended application dated December 22, 2017): [ translation ] 11. The property in question was purchased by the plaintiff for commercial, not personal, purposes; 12. In fact, as appears from the deed of sale, exhibit P-4, already disclosed, the seller of the property in question was a business, Entreprises du Lac Corne Inc., registered for QST, as is the plaintiff; 13.

As appears from the deed of sale, exhibit P-4, already disclosed, the plaintiff and the seller of the property explicitly and jointly made the choice in the deed of sale for no QST to be paid pursuant to s. 75 of the Act respecting the Québec sales tax ; 14. ... Accordingly, the $2,407 in duties that are the subject of the new assessment, exhibit P-1, are non-existent and cannot be claimed by the plaintiff; 15. Also, all the input tax refunds claimed by the plaintiff... were lawfully... claimed; 16.

Indeed, considering that the property was purchased for commercial purposes and that the expenses were incurred to earn business income, the plaintiff was entitled to the ITRs claimed in the amount of $15,413.47; EVIDENCE [ 27 ] The plaintiff called twelve witnesses to testify, including himself, his son Marco, his wife Sioui, and accountant Jacques Lalumière (“Lalumière”).

For the defence, the ARQ called nine witnesses: auditor Martin Aumais (“Aumais”), objection officer François Fontaine (“Fontaine”), Sûreté du Québec police investigator Josée Forget (“Forget”), a tenant of the building located on [A Street], in La Plaine, Diane Villeneuve (“Villeneuve”), Hydro-Québec special constable Hugues-Martin Lefebvre (“Lefebvre”), city of Terrebonne retired police officer Robert Couture (“Couture”), city of Terrebonne Sergeant-detective Richard Desforges (“Desforges”), two expert witnesses, that is, Hydro-Québec energy theft inspector Michel Lambert (“Lambert”) and Sûreté du Québec retired police officer and drug expert Suzanne De Larochelière (“De Larochelière”).

Leroux [ 28 ] Currently retired, the plaintiff testified on the nature of his transport business (Entreprise Jacques Leroux enr.).

[ 29 ] Essentially, the operation of this business consisted of transporting automobiles that had been damaged in crashes, and his main client was “Prestige Collision Inc.”. [ 30 ] He confirmed that he did not have any employees working for him during the years at issue. [ 31 ] With respect to the income properties, he cannot explain why sometimes he is the sole owner and at other times, he co-owns the buildings with his wife Sioui or his son Marco. [ 32 ] He did not provide any explanation for the different co-ownership ratio (e.g., 33 and a third percent, 33.33%) when a building is co-owned with Sioui and Marco, or why the percentage of ownership for the [A Street] residence is different from that at the [B Street] residence in La Plaine. [ 33 ] He also testified on the fact that some tenants do not ask to sign a lease, while others do. [ 34 ] With respect to the [A Street] residence, he confirmed that the ground floor was rented to Villeneuve and her spouse, Valiquette.

These two persons rented the ground floor of that house as of July 1, 2005. [ 35 ] He also claims that he built a bachelor apartment in the basement and that he barred and locked the door giving access to the basement from the ground floor. [ 36 ] According to Leroux, the basement was rented to a man named Serge Fournier (“Fournier”). [ 37 ] Leroux stated that Fournier paid his rent in cash and that there was no written lease.

According to Leroux, Fournier claimed to be a truck driver. [ 38 ] The plaintiff claims that he went to the basement apartment of that building only two or three times between 2005 and 2008. [ 39 ] With regard to the residence located on [B Street], which was purchased in October 2004, he stated that he had three tenants between 2004 and 2008, first a single woman and her two children, then a couple, and finally, Michel Lemieux (“Lemieux”). [ 40 ] As was the case with Fournier in the basement of the residence on [A Street] in La Plaine, however, no lease was filed into evidence for the house located on [B Street]. [ 41 ] When questioned by counsel for the ARQ who sought to know why, during his out-of-court examination in 2018, Leroux had not given Fournier’s name as the tenant of the basement apartment on [A Street], the plaintiff had no explanation. [ 42 ] Leroux testified that it was in 2008, during a visit to the [A Street] residence to make some repairs, that he discovered the hydroponic greenhouse in the basement of that house. [ 43 ] At the hearing, he claimed that he had doubts about all of his tenants.

Despite this fact, he did not deem it appropriate to call the police after discovering the greenhouse on [A Street]. He claims that he then went to the [B Street] property to check on it.

He said that he noted the same thing. [ 44 ] These [ translation ] “discoveries” were made a few days before the May 20, 2008, search. [ 45 ] When confronted with the photographs taken by the police following the search of the [B Street] residence (D-35), on which a pair of sunglasses appears, he confirmed that they are his, explaining that he must have forgotten them there when he went to check on the property. [ 46 ] He admitted to having been criminally charged in connection with the searches of the [A Street] and [B Street] residences and says that he chose to plead guilty to the counts of “possession for the purpose of trafficking” because he received an offer for the other charges to be stayed, and the period concerning the charge to which he pleaded guilty was reduced and ultimately limited to the period [ translation ] “between March 1 and May 20, 2008” (P-9). [ 47 ] With respect to the building bought in Saint-Côme in 2004, Leroux states that he initially purchased it for a new commercial transport project.

However, though its planned use was commercial, he added that the project never materialized given his wife’s illness. [ 48 ] He also confirmed that this property, located near Lac Côme, included an apartment, which had not been finished. [ 49 ] When cross-examined, Leroux admitted that he and his wife sought to change the rate from commercial to residential starting on February 27, 2004, (P-8 at 68, 69, and 70), because, he claimed, there was no business in that building.

Marco [ 50 ] In brief testimony, the plaintiff’s son added that he co-owned the buildings located on [B Street] and [A Street] with his father. [ 51 ] He confirmed, however, that he was the sole owner of the residence located at 6110 Marco Street (“Marco Street”), another location searched by the police on May 20, 2008. He said that this house was also rented. [ 52 ] Moreover, he admitted that his father controlled everything with respect to collecting rent and managing the buildings.

Sioui [ 53 ] In testimony that was also very brief, Leroux’s wife confirmed that it was her husband who took care of the rental properties.

[ 54 ] She also confirmed that given her medical condition, she was unable to work for her husband’s business during the period at issue. [ 55 ] With respect to the Saint-Côme property, she asserted that her husband initially bought it to operate a [ translation ] “container” business there. [ 56 ] She said that this project was not realized because her illness reappeared. [ 57 ] She confirmed that this property was located near the lake and that she went there overnight with her husband on a few occasions, to walk around the lake.

Lalumière [ 58 ] Lalumière is a CPA and testified that he was in charge of the plaintiff’s accounting from 2005 to 2014. [ 59 ] Basically, Leroux would provide him with the invoices, cheques, and budgets, and he prepared the financial statements according to this information. [ 60 ] When cross-examined, he confirmed that he did not have the mandate to conduct a review engagement, and even less an audit, and that he only prepared an accounting of the income and expenses according to the information provided [ 61 ] He claims that he prepared the income tax returns (P-5) and rental income summaries (form TP-128). [ 62 ] With respect to the tax audit, Lalumière confirmed that he read the document prepared by the auditor (D-13), but claims that he quickly realized that it was a big deal and decided to transfer the file to an attorney. [ 63 ] He added that he did not think that he had discussed this subject with the auditor.

Forget [ 64 ] Forget, who was with the operational information unit of the Sûreté du Québec at the time, testified using her personal notes (D-29) and the

summary of facts (D-22) about her meeting with the tenant Villeneuve and her spouse Valiquette. [ 65 ] She claimed that she took Villeneuve’s and Valiquette’s statements at 6:15 a.m., on May 20, 2008, the day of the search, while they were in the kitchen of their residence located on [A Street]. [ 66 ] According to Forget’s notes and the

summary of facts, Villeneuve told her that she did not have access to the basement and that the only person she ever saw going into the basement was the owner (Leroux). [ 67 ] Villeneuve told her that she never saw the basement tenant. According to Forget, she also told her that she did not know how often Leroux came, although he came by every month to collect the rent. [ 68 ] In Forget’s notebook (D-29), there is the additional detail that at 7:50 a.m., she read the statements (D-22 at 34 to 36) to Villeneuve and Valiquette and that Villeneuve signed the document she had before her.

Villeneuve [ 69 ] Villeneuve and her spouse, Valiquette, were the tenants of the ground floor of the [A Street] residence when the May 20, 2008, search was carried out. [ 70 ] In very difficult testimony marked by obvious reluctance and punctuated by many memory lapses, she said that she remembered meeting with a police officer. [ 71 ] She recognized her signature on a statement (D-22 at 34 to 36) made on May 20, 2008, to Officer Forget, in which she confirmed the different information recounted by Forget in document D-29. [ 72 ] She claimed that she never smelled cannabis between 2004 and 2008 and that she did not remember whether she heard any noises coming from the basement, like several fans working at once.

Lefebvre [ 73 ] Lefebvre is a special constable with Hydro-Québec assigned to the information unit for special projects, including cases of electricity theft. [ 74 ] Lefebvre has conducted 250 investigations concerning cannabis and testified in court on several occasions. [ 75 ] In 2008, he took

part in Operation “Éclair” with the Sûreté du Québec and the Terrebonne police department. [ 76 ] Lefebvre testified about the electrical bypass he noticed at the [A Street] residence. [ 77 ] He went there after the May 20, 2008, search and met with the tenant Valiquette. [ 78 ] He testified on a variety of things including the photographs (D-25) taken at that residence, which show the electrical bypass work, among other things (D-25 at 41 and 43).

[ 79 ] He also claims that the electrical bypass work at the [B Street] residence is similar, even quasi-identical (D-31) to that done at Montée Major. [ 80 ] Lefebvre testified on his investigation report (D-22 at 8), in which he added the following: [ translation ] Mr. Leroux’s residence housed 20 lamps for the cultivation of cannabis. During our meeting with Gaétan Valiquette, tenant with Diane Villeneuve [from address 1], he indicated to us that Mr. Leroux went into the basement of the residence, where the greenhouse was, 2–3 times a week. Mr.

Valiquette told us that these goings-on had been taking place since he had moved into the premises in July 2005. Mr. Valiquette remembers that soon before the search, Mr. Leroux went to the basement to repair the pump. After the search, Mr. Leroux told Mr. Valiquette that when he got the Hydro bill, he only had to tell him, and Mr.

Leroux would take care of it. [ 81 ] Counsel for the plaintiff objected to this testimony at the hearing. [ 82 ] The objection was taken under advisement and, for the reasons below, the Court concludes that Lefebvre’s report and his testimony about Valiquette’s remarks will be admitted into evidence. [ 83 ] Counsel for Leroux argued that it is hearsay because Valiquette did not sign a statement to this end and that, because Valiquette is now deceased, Revenu Québec cannot demonstrate the reliability of what is reported in Lefebvre’s investigation report. [ 84 ] In this respect, it is relevant to reproduce

article 2870 of the Civil Code of Québec [6] (“ C.C.Q. ”): 2870. A statement made by a person who does not appear as a witness, concerning facts to which he could have legally testified, is admissible as testimony on application and after notice is given to the adverse party, provided the court authorizes it. The court shall, however, ascertain that it is impossible for the declarant to appear as a witness, or that it is unreasonable to require him to do so, and that the reliability of the statement is sufficiently guaranteed by the circumstances in which it is made.

Reliability is presumed to be sufficiently guaranteed with respect in particular to documents drawn up in the ordinary course of business of an enterprise, to documents entered in a register required by law to be kept, and spontaneous statements that are contemporaneous to the occurrence of the facts. [ 85 ] In this case, the Court finds that Valiquette’s statement to Lefebvre following the search was made in circumstances that were contemporaneous to the events, making the reliability of that statement sufficiently guaranteed. [ 86 ] On cross-examination, Lefebvre admitted that he wrote his report only in October 2008, because, he claims, he had 30 reports to prepare following the May 2008 seizure. [ 87 ] He also did not feel it was appropriate, at the time, to have Valiquette sign the statement. [ 88 ] He reasserted, however, that Valiquette’s remarks, as related in his report, are true.

Lambert [ 89 ] Lambert testified as an expert in measuring energy theft for Hydro-Québec. [ 90 ] As his report recounts (D-22 at 9 to 13 plus the schedules), he went to the [A Street] residence on May 20, 2008, at approximately 6:15 a.m. [ 91 ] He inspected this home, the hydroponic greenhouse, and the electrical installations. He performed a [ translation ] “pole” test with a metric ampere pincer on the pole, which allowed him to conclude that there was a 33,972-watt consumption, where the timed test of the counter indicated only 6,629 watts.

There was therefore a 27,343-watt difference in consumption that was not recorded by the counter, due to the electrical current bypass between the head of the pole and the counter. [ 92 ] He noticed that in the basement of the residence, there were twenty 1,000-watt lights, 20 transformers, a 15-hour timer, a 13- hour timer, a 60,000 BTU air conditioner, a 185-watt exhaust fan, three 150-watt exhaust fans, and two 52-watt pedestal fans. [ 93 ] Lambert confirmed that the mandate for his expert report, in which he concluded that there was a hydro-electricity theft of $88,576.54, was to prepare a report for the purpose of bringing proceedings against Leroux to recover from the plaintiff the amounts relating to the energy theft. [ 94 ] He admitted, however, that no proceedings were brought against the plaintiff.

Fontaine [ 95 ] Fontaine is an objection officer with the ARQ. His testimony, which was very brief, confirmed that he upheld the notices of assessment issued by the audit department.

[ 96 ] He claims that he never met the plaintiff or the accountant Lalumière, and that, moreover, no representations concerning the supporting documentation or other documents was presented or submitted in objection concerning income tax or QST. Couture [ 97 ] Couture is a retired police officer with the city of Terrebonne.

He was a major crimes and narcotics investigator. [ 98 ] He testified that over the course of his career, he was involved in over 200 searches linked to cannabis. [ 99 ] He testified that he was the principal inspector on Operation “Éclair” and that as such, he was responsible for the 26 searches that took place on the same day, including the two carried out at the [A Street] and [B Street] residences. [ 100 ] He testified on his summaries of facts (D-22 and D-24).

Couture asserted that he personally performed the thermal imagery (FLIR technique), with an infrared device that can show overconsumption on the electrical wires that go into the poles of homes. [ 101 ] He testified that he performed this thermal imagery at the [A Street] residence on April 29, 2008, and at the [B Street] residence on May 6, 2008. [ 102 ] With respect to the [A Street] residence, the

summary of facts (D-22) indicates that the number of plants in the basement was 144; it was a hydroponic greenhouse. There were twenty 1,000-watt lights in use, and according to his estimate, the equipment on site was worth about $25,000. There was an odour of cannabis and the noise of fans, which was noticeable on the ground floor of the home. [ 103 ] With respect to the [B Street] residence, there were two rooms in the basement that were used for production, including 154 hydroponic cannabis plants that were about 18 inches high in one room, and 289 cannabis plants that were also 18 inches high in another room.

The total number of cannabis plants was 443. [ 104 ] There were thirty-one 1,000-watt lights in use and the value of the equipment on site was approximately $40,000. [ 105 ] The

summary of facts (D-24) concerning the [B Street] residence indicates that on the ground floor, the fridge was empty, as were the kitchen cupboards. There was no food. Like in the [A Street] residence, the ground floor stairwell to the basement had been blocked with plywood. Desforges [ 106 ] Desforges is a sergeant-detective with the organized crime

section of the Sûreté du Québec. He was assigned to Operation “Éclair” in 2008 and confirmed that he was involved in that operation with Officer Couture. [ 107 ] He and Couture were together when the thermal imagery (FLIR) was taken to detect the electric consumption of the [B Street] residence. [ 108 ] He was the team leader during the May 20, 2008, search at that address. [ 109 ] Thus, he basically confirmed the

summary of facts contained in D-24. Aumais [ 110 ] Aumais has been an auditor with Revenu Québec since 2004. Since 2007, he has worked in files dealing with the underworld and, as such, he has audited over a hundred files. [ 111 ] His testimony concerned the [ translation ] “Audit report following an operation carried out by the main investigation division” (D-10).

This file arises from police information obtained from the Terrebonne police department, in conjunction with the Sûreté du Québec, the Royal Canada Mounted Police, and Hydro-Québec. [ 112 ] With regard to determining the plaintiff’s income, Aumais confirmed that he used the projected marijuana harvest method, and that to corroborate the additional income from this production, he also audited using the indirect net worth method. [ 113 ] According to Aumais, and as specified in his audit report (D-10 at 9), a reservation was necessary following the audit based on the net worth method because he noted that several payments had been made without transiting through bank accounts, which meant that he was unable to establish all of the household expenses. [ 114 ] In spite of this, following this net worth analysis, he concluded that the income reported by Leroux and his spouse, which amounted to $165,390 from 2005 to 2008 was insufficient to establish the difference with the net assets, which amount to $1,209,940 for the same period. [ 115 ] Finally, he also performed a direct audit of the plaintiff’s business and rental expenses. [ 116 ] Once his analysis complete, he refused an amount of $301,559 for the period between 2004 and 2008. [ 117 ] However, and as the Court specified above, this amount was lowered at the hearing, with the result that the 2004 tax year is no longer at issue, and the only amounts still contested by the ARQ are $43,392.50 for 2005, $55,507.47 for 2006, $37,191.48 for 2007, and $35,042.67 for 2008, for a total of $171,134.12. [ 118 ] With respect to the QST file (report D-10 at 15 et seq .), Aumais considered that the purchase of the building in Saint-Côme was for Leroux and his spouse’s personal use, and consequently, that QST should have been remitted on June 30, 2004, in the amount of $2,407.

[ 119 ] Moreover, he also refused several input tax refunds because to be entitled to such refunds, goods and services must have been purchased to provide a taxable supply in the context of commercial activities.

He therefore refused $15,413.47 in ITRs for the December 2005 to December 2008 quarterly remittance periods. [ 120 ] With regard to determining income using the projected marijuana harvest method, Aumais testified that he relied on the information in the file, which came from Suzanne De Larochelière of the Sûreté du Québec. [ 121 ] According to this data, mature cannabis plants yield between 2.5 oz. and 5 oz. of marijuana. Marijuana produced in a hydroponic greenhouse is sold for between $1,800 and $2,000 per pound.

A greenhouse can produce six to eight harvests annually. [ 122 ] Finally, he deems that he was very conservative in his assessment of the harvests because he based his calculations on six annual harvests, using 2.5 oz. of cannabis per plant and, finally, using the minimum marijuana price of $1,800 per pound. [ 123 ] These calculations, more amply detailed in the tables found in his audit report (D-10 at 7), indicate the value, and therefore the income, for the period between 2005 and 2008, based on the cannabis plants, lights, and equipment seized in the two residences at issue. [ 124 ] According to his calculations, the income from the production of cannabis between 2005 and 2008 totalled $3,139,877. [ 125 ] To justify why only Leroux was assessed for the income resulting from the production of cannabis, when the [A Street] and [B Street] residences also belonged to his spouse and son, Aumais justified his assessments by the fact that it was the plaintiff who took care and controlled the two houses according to the police reports. [ 126 ] What is more, the statements of Valiquette and Villeneuve confirmed for the police officers that Leroux had regular access to the basement of the [A Street] residence. [ 127 ] Finally, the audit based on the alternative net worth method seemed to indicate strongly that Leroux, according to the reported net income, had accumulated many more assets than his reported income should have allowed for. [ 128 ] When cross-examined, Aumais recognized a few errors with respect to the analysis of the cost of living per net worth, specifically with regard to the building identified in

schedule 7 of balance sheet D-13, that is, the building located on Ste-Émilie Road in Saint-Côme. [ 129 ] He admitted that some of the calculations (additions or subtractions) could have an impact on net worth, but that, in any event, he did not put all the focus on this alternative audit method because, first, several transactions were in cash, and second, he put all his focus on calculating income in accordance with the projected marijuana harvest method. [ 130 ] Finally, with respect to the plaintiff’s rental income, Aumais asserted, based on the tax return and the TP-128 forms filed by the plaintiff (P-5), that he had not reported all the rental income in 2005, 2006, and 2007 because, if we are to believe the testimony of Leroux, the building on [A Street] had been rented to two tenants, the ground floor to Villeneuve and Valiquette, and the basement to someone named Fournier. [ 131 ] If that is true (that Fournier was a tenant), the TP-128 forms indicate a single apartment and only the income from the ground floor rental was reported.

De Larochelière [ 132 ] De Larochelière, a police officer with the Sûreté du Québec who retired in April 2018, took

part in over 900 drug investigations over the course of her career and dismantled several clandestine chemical laboratories (curriculum vitae, D-34). [ 133 ] She testified on her expert report (D-37), through which the ARQ sought her opinion on the data used by the auditor Aumais and his conclusions on the income from the production of cannabis according to the evidence obtained from the searches of the [A Street] and [B Street] residences. [ 134 ] De Larochelière basically confirmed the calculations of the auditor Aumais, adding that the estimated income from the production of cannabis for the period at issue is low, that is, $3,139,920, because Aumais used very conservative data to reach that result. [ 135 ] In her view, the hydroponic greenhouses discovered in these two residences could have produced as much as $6,279,840 in income and estimates that it is very likely that the income generated by the two greenhouses is instead closer to $4,698,000. [ 136 ] Finally, and as the cross-examination showed, the conclusions of her report are based on the periods identified by Aumais between the years 2005 and 2008.

ANALYSIS Burden of proof [ 137 ] Let us first recall the rules of evidence in taxation matters. It is well known that a notice of assessment benefits from a presumption of validity pursuant to s. 1014 of the Act , which provides: 1014 . An assessment shall, subject to being varied or vacated on an objection, appeal or

summary 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.

[ 138 ] In St-Georges c. Québec (sous-ministre du Revenu) , [7] the Court of Appeal of Quebec summarized the rules of evidence relating to the presumption of validity of tax assessments as follows: [ translation ] 1. Tax assessments benefit from a presumption of validity that may be rebutted by the taxpayer; 2. The initial burden of the taxpayer is to [ translation ] “discredit” the accuracy of the presumption by making a prima facie case; 3. When a taxpayer presents such evidence, the burden of proof shifts; 4.

The tax authorities must then rebut the prima facie evidence and prove the assessment that has been established by presumption. [ 139 ] A prima facie case is one supported by evidence that raises such a degree of probability in its favour that it must be accepted if believed by the Court, unless it is rebutted or the contrary is proved. [8] [ 140 ] A taxpayer’s evidence must, however, include a certain degree of precision and probability in his or her favour rather than vague and ambiguous allegations.

As a general rule, a mere assertion by a taxpayer will be insufficient; this assertion will benefit from being supported by documentary or circumstantial evidence or corroborated by other witnesses. [ 141 ] Finally, the idea that a mere denial by the taxpayer could always rebut the presumption of validity under s. 1014 of the Act would deprive that provision of any meaning. [9] [ 142 ] With respect to the alternative auditing methods, the Court wishes to add that the ARQ is not bound by a person’s tax return or by the information that person provides. [10] [ 143 ] In SMRQ c.

Chenel , [11] the Court of Appeal expounded on the usefulness of the alternative methods in question in the context of the Quebec tax system: [ translation ] [27] In some cases, however, this system focussed on transparency can be problematic. For example, a person may decide to defraud the department by preparing false returns. It also happens that the calculation made by a taxpayer may be wrong or incomplete. This is why the deputy minister of revenue has prerogatives where audits are concerned (s. 95.1 T.A .). … [29] It is apparent that the taxpayer has a duty of minimal diligence.

Despite being in a better position to understand his or her financial situation as a whole, the taxpayer cannot complain if he or she is unable to prove the merits of his or her calculations. Moreover, the minister may intervene if the lifestyle of a citizen or recently acquired assets reveal a clear disproportion between the income reported by the citizen and the lifestyle or assets recently acquired.

As long as the taxpayer may object to the assessment, explain the numbers, and thereby discredit the department’s arguments, no rule of law is violated. [30] These days, the reasoning of Thorson, J. is reflected in federal and provincial tax practices. The freedom enjoyed by the department even extends to a certain form of arbitrariness. When faced with an inaccurate, unrealistic, or non-compliant (or even non-existent) return, the state may attempt to guess the actual scope of a given value. Obviously, it must avoid pure fantasy.

Prejudicial accounting practices would be an intolerable form of administrative abuse. However, the department has considerable leeway and its conclusions are presumed to be accurate. [ 144 ] With respect to the means of proof, it should be recalled that a taxpayer, to reverse his or her burden of proof, may adduce evidence using the means enumerated in art. 2811 C.C.Q.: 2811.

A fact or juridical act may be proved by a writing, by testimony, by presumption, by admission or by the production of real evidence, according to the rules set forth in this Book and in the manner provided in the Code of Civil Procedure (chapter C-25.01 ) or in any other Act . [ 145 ] In this respect, the Court of Appeal of Quebec, in Bilodeau c.

Sous-ministre du Revenue du Québec , reiterated that any means of proof, including testimony, may be used by a taxpayer to rebut the presumption of validity of the factual hypotheses accepted by the minister: [ translation ] The presumption of validity of the assessment concerns only the burden of proof. It does not in any way depart from the legality of the means of proof.

To argue that it prohibits a judge from ruling based only on the taxpayer’s testimony would be to confuse the two. [12] [ 146 ] The Court would like to point out that while it goes without saying that a judge may rule based solely on the taxpayer’s testimony, such testimonial evidence must be probative and must not contain any major implausibilities or contradictions. Credibility must not be called into question. [ 147 ] In this respect, it is relevant to recall art. 2845 C.C.Q.: 2845. The probative force of testimony is left to the appraisal of the court. Normal reassessment period

[ 148 ] With respect to the minister’s power to issue a notice of assessment beyond the normal reassessment period, ss. 1010(1) and (2) ( b )(

i) of the Act state: 1. The Minister may at any time determine the tax, interest and penalties payable under this Part, or give notice in writing to any taxpayer who filed a fiscal return for a taxation year that no tax is payable for that taxation year. 2. The Minister may also redetermine the tax, interest and penalties payable under this Part and make a reassessment or an additional assessment, as the case may be , (

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; … (

b) at any time, if the taxpayer or the person who filed the return i. has made a misrepresentation that is attributable to negligence or wilful default or has committed any fraud in filing the return or in supplying any information provided for in this Part, or (Emphasis added.) [ 149 ] With regard to the notion of “misrepresentation” referred to in s. 1010(2) ( b )(

i) of the Act , the case law has confirmed that this misrepresentation need not be fraudulent; it will be enough for this representation to be [ translation ] “false” even if it was made in good faith. [13] [ 150 ] Furthermore, the expression “negligence” is, or may be, defined as [ translation ] “carelessness or sloppiness” and may even be the result of the actions of a mandatary. [14] [ 151 ] Finally, it is up to the ARQ to prove, on a balance of probabilities, that the plaintiff made a misrepresentation through negligence or willful default. [ 152 ] In Lacroix , [15] the Federal Court of Appeal analyzed the scope of sections 152 and 163 of the Federal Income Tax Act , which are the counterparts of sections 1010 and 1049 of the Act .

The Federal Court of Appeal stated the following with respect to the burden of proof incumbent upon the Minister: What, then, of the burden of proof on the Minister? How does he discharge this burden? There may be circumstances where the Minister would be able to show direct evidence of the taxpayer’s state of mind at the time the tax return was filed. However, in the vast majority of cases, the Minister will be limited to undermining the taxpayer’s credibility by either adducing evidence or cross-examining the taxpayer.

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

i) and subsection 162(3).

Income tax file Additional income based on the projected marijuana harvests method [ 153 ] First, the ARQ had to prove, on a balance of probabilities, that the plaintiff made a misrepresentation through negligence or willful default or that he committed fraud in the filing of his tax returns for 2004, 2005, and 2006. [ 154 ] As specified in Lacroix , [16] supra , in most cases, the Minister will be limited to undermining the taxpayer’s credibility by either adducing evidence or cross-examining the taxpayer. [ 155 ] Insofar as the Court is convinced that the taxpayer earned unreported income and did not provide a credible explanation for the discrepancy between his or her reported income and the increase in his or her assets, the tax authorities will have discharged their burden of proof. [ 156 ] Is that the case here? [ 157 ] Basically, Leroux’s case theory relies on the fact that he was unaware that cannabis was being grown in hydroponic greenhouses in the two residences that were searched on May 20, 2008. [ 158 ] He argues that the basements of both these residences were rented to two individuals, Fournier and Lemieux, and that there is nothing connecting him personally to the illegal production of cannabis. [ 159 ] In fact, and as indicated in the amended application, he submits that the tax authorities failed to prove that he had received the income calculated according to the projected marijuana harvests method. [ 160 ] The problem with this case theory is that Leroux pleaded guilty to charges of possession for the purpose of trafficking (P-9). [ 161 ] It is not possible, on the one hand, to plead ignorance that cannabis was being cultivated in two properties he was actively taking care of (according to the testimony of Villeneuve, as well as his wife and his son) and, on the other, to agree to plead guilty to having been in possession of cannabis for the purpose of trafficking. [ 162 ] Counsel for the plaintiff correctly cites the fact that scholarly commentary and case law unanimously recognize that a criminal conviction is not res judicata between the parties because, obviously, the parties are not the same. [17]

[ 163 ] However, in that same judgment, France Thibault, J.A. added that: [ translation ] “a criminal judgment is a juridical fact that cannot be ignored, that is relevant, and that may be vital due to its probative value.

Civil judges must, without giving the criminal conviction the authority of a final judgment in fact or law, be free, according to circumstances, to draw the relevant conclusions and presumptions of fact .” [18] [ 164 ] In this case, the plaintiff admits to pleading guilty of having cannabis in his possession for the purpose of trafficking between March 1 and May 20, 2008 (P-9). [ 165 ] This is an admission, and according to art. 2852 C.C.Q., the probative force of this admission is left to the appraisal of the Court: 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. [ 166 ] During the hearing, when trying to explain why he pleaded guilty, Leroux indicated that he had received an offer to reduce the possession period to about two months because the [ translation ] “file was dragging”. [ 167 ] Pleading guilty to criminal charges is not trivial.

Sections 606(1) and (1.1) of the Criminal Code state: Pleas permitted 606

(1) An accused who is called on to plead may plead guilty or not guilty, or the special pleas authorized by this Part and no others. Conditions for accepting guilty plea

(1.1) A court may accept a plea of guilty only if it is satisfied that (

a) the accused is making the plea voluntarily; (

b) the accused understands (

i) that the plea is an admission of the essential elements of the offence , (ii) the nature and consequences of the plea , and (iii) that the court is not bound by any agreement made between the accused and the prosecutor; (Emphasis added.) [ 168 ] The evidence in this case is overwhelming. [ 169 ] First, it was demonstrated that Leroux alone took care of managing the residences, repairing them, and collecting rent.

His wife and son agree, adding that he took care of and controlled everything. [ 170 ] The testimony of his son Marco also concerned another residence, the one on Marco Street, which is not the plaintiff’s property. [ 171 ] This last residence was also searched on May 20, 2008, and hydroponic greenhouses were found there.

The son admitted that his father took care of everything regarding this residence. [ 172 ] It has been clearly shown that the hydroponic greenhouses found in the [A Street], [B Street], and Marco Street residences bore the same [ translation ] “signature” with respect to the electrical installations and equipment. [ 173 ] The type of lights used, the fans, the alignment of the cannabis plants, at angles, the timers, and the electrical bypass were the same.

The evidence adduced by the defendant in this respect, through either the police officers, the Hydro-Québec inspectors, or the expert De Larochelière, was never contradicted or even seriously impugned. [ 174 ] Also, in light of the evidence as a whole, it is clear, in the Court’s view, that Leroux was involved in the production of cannabis and that he is lying when he claims that only the tenants of these buildings can be responsible for the production of cannabis and construction of the hydroponic greenhouses in the three residences. [ 175 ] In fact, with respect to the “supposed” tenants, Leroux submitted no lease agreement or any other information about the identity of Lemieux and Fournier.

They are simply nowhere to be found, if these two individuals even exist. [ 176 ] In light of the above, the Court concludes that the ARQ has met its burden under s. 1010 of the Act and has proved that Leroux made misrepresentations or committed fraud when he filed his returns. [ 177 ] In light of this conclusion, the notices of assessment are therefore deemed to be valid pursuant to s. 1014 of the Act . [ 178 ] Thus, Leroux had to present prima facie evidence [ translation ] “discrediting” the accuracy of the notices of assessment. [ 179 ] In this case, the plaintiff decided to take a gamble by not making any admissions on the income from this illicit business or with regard to the expenses incurred to operate the greenhouses. [ 180 ] In his amended application, the plaintiff merely asserted that the ARQ could not prove that he had earned $3,139,877 between

2005 and 2008. [ 181 ] For its part, the ARQ administered evidence based on inferences drawn from police investigations and also on uncontested facts, like the dates of purchase of the [A Street] and [B Street] residences and the only admitted lease agreement involving the Villeneuve- Valiquette couple in 2005. [ 182 ] It is possible that the hypotheses used by the ARQ for the production periods, that is, from 2005 to 2008, do not exactly and faithfully represent reality. [ 183 ] The burden of proof was on Leroux to demonstrate that these hypotheses were either unrealistic or wrong in this case. [ 184 ] The Court is of the view that the plaintiff failed to do so. [ 185 ] What is more, the testimony of the police officers and the Sûreté du Québec expert, De Larochelière, enlightened the Court concerning current practices used for the culture of cannabis in hydroponic greenhouses. [ 186 ] The plaintiff, who only called into question the period of production, did not contradict this evidence concerning the yield of this type of production. [ 187 ] It was up to him to show that the periods were wrong or that other people, like the tenants or other third parties, were involved in this illegal production.

The plaintiff adduced no evidence in this respect. [ 188 ] In fact, it is unthinkable, in light of the quantity of cannabis found in the two residences and the nature of the installations for production, that Leroux, who claimed that he came by each month to collect the rent, never noticed this production of cannabis in light of the noise and odour generated by the production in question. [ 189 ] In any event, the evidence shows that Leroux went into the basement of the [A Street] residence a few times a week. [ 190 ] Accordingly, the Court concludes that the plaintiff has failed to show that the hypotheses used by the ARQ to reach $3,139,877 in unreported income were without merit.

Refused expenses [ 191 ] The amount of $301,559 that was initially refused by the ARQ was lowered at the hearing and is now established, after certain admissions, at $171,134.12. [ 192 ] In the amended application, the plaintiff indicates that he relies on exhibit P-8 to justify the amount of $301,559 that was originally refused. [ 193 ] At the hearing, however, two other documents, P-8.A and P-8.B, were filed, and with respect to P-8.B, the plaintiff’s testimony was limited to certain supporting documents. [ 194 ] The following analysis considers only Leroux’s testimony on the supporting documents in question (P-8.B). − Invoice P-8A at 51 – $7,200 plus taxes (2006): Leroux indicated that this was an expense he had to incur after an accident when one of his trucks hit a client’s air conditioner- dehumidifier unit located in that client’s yard.

In light of the explanations provided, this amount will be allowed. − Invoice P-8.A at 52 – $2,395 plus taxes (2006): According to Leroux, this is an invoice from the electrician Richard Blais, who supplied and installed a transformer in his business’s garage located at 2275 Comtois Road in Terrebonne. In light of the invoice submitted and Leroux’s testimony, the Court will allow this expense of $2,395 plus taxes. − Invoice P-8.A at 58 – $60 plus taxes (2006): According to Leroux, this is a bill from his veterinarian for grooming his dog Bandit.

Although Leroux testified that his dog is used as something of an [ translation ] “alarm system”, the Court will not allow this expense given its extremely personal nature. − Invoice P-8.A at 45 – $6,744.75 plus taxes (2006): According to the plaintiff, this is an invoice for insulation services provided for the building located on Ste-Émilie Road in Saint-Côme. According to Leroux, spray polyurethane foam was added to insulate the building.

For the following reasons, in the analysis of the QST file, the Court will refuse this expense because the facts have shown that it is a personal expense. − Invoice P-8.A at 41 – $406.97 (2007): This is an invoice for municipal taxes for the building in Saint-Côme. In light of the Court’s conclusions that it is a personal expense, it will be refused. − Invoice P-8.A at 31 – $675 plus taxes (2008): This is an invoice paid by Leroux to Transport Kino Leroux for snow removal. In light of Leroux’s testimony, this expense will be allowed.

− Invoice P-8.A at 29 – $700 plus taxes (2008): According to Leroux, this is another expense paid to Transport Kino Leroux. This expense will also be allowed. − Invoice P-8.A at 12 – $270 plus taxes (2008): This is an expense paid to Les Armoires Montcalm for the building in Saint-Côme.

Given the Court’s conclusions that this building was purchased for personal purposes, this expense will not be granted. − Invoice P-8.A at 30 – $700 plus taxes (2008): This is an expense for snow removal invoiced to Transport Kino Leroux This expense is allowed. − Invoice P-8.A at 1 – $40 plus taxes (2008): This is an invoice issued by Grand Ligne Moto Inc. concerning parts for a Husqvarna chain saw. According to Leroux, he uses this chain saw for his business when, on occasion, he must place wooden blocks under cars he transports.

In light of the explanations, this expense is allowed. − Invoice P-8.A – $19,200 plus taxes (2005): Finally, this expense was, according to Leroux, the rent paid to Angelo Gizi to rent commercial premises in Laval. He says that he had decided to rent these premises to store some damaged automobiles that he had to tow during the week, so that he could get them again on the weekend, when traffic was lighter than during the week. No lease agreement was filed.

In light of the lack of probative supporting documents and the insufficient evidence in this respect, the Court will refuse this expense. [ 195 ] In light of the above, the Court concludes that the following additional expenses should be admitted for the following years: Year 2006 2008 Expenses $9,595.00 $2,115.40 [ 196 ] With respect to the penalties imposed, the Court, after considering the principles in St-Georges c. Québec (Sous-Ministre du Revenu) , [19] finds that the penalties were correctly applied to all of the additional income and the refused expenses.

QST file [ 197 ] Counsel for the plaintiff argues the fact that the notice of assessment concerning QST was issued outside the normal reassessment period and, consequently, the ARQ must prove error, omission, or carelessness. [ 198 ] The evidence, however, reveals that the purchase of this building, in 2004, included no indicia of commerciality, according to the principle established in Stewart v.

Canada . [20] [ 199 ] The facts in this case show that this building was purchased for personal purposes and, therefore, the plaintiff knew or should have known that the ITR claim for expenses concerning this building could not be granted.

To be entitled to an ITR, the goods and service must have been purchased to provide a taxable supply, which is not the case here. [ 200 ] The ARQ has therefore proved Leroux’s error, omission, or even negligence. [ 201 ] In fact, Leroux and his wife had asked Hydro-Québec for the residential rather than the commercial rate. [ 202 ] Furthermore, Leroux is a businessperson who has a transport business and several rental buildings and therefore has the necessary knowledge to distinguish commercial activities from personal ones. [ 203 ] Because the expenses for which the ITRs were claimed were incurred for personal activities, the ITRs are refused. [ 204 ] Moreover, because the QST was not paid when the building was purchased in 2004, the ARQ is correct to assess the $2,407 in duties for unremitted QST, for that year. [ 205 ] Finally, the penalty under s. 59.2 T.A.A . for failure to collect and remit the QST is, accordingly, applicable. [ 206 ] With respect to the penalty under s. 59.3 T.A.A . , that is, 50% of the uncollected QST and of the refused ITRs in the amount of $15,413.47, it is justified because Leroux should have known that the inputs he was claiming were not justified since the facts show that this building was intended to be used as a secondary residence. [ 207 ] In light of the above, the notice of assessment for QST is well founded in fact and in law.

FOR THESE REASONS, THE COURT: In file 500-80-029852-141: ALLOWS the appeal in part; Refers notices of assessment MR656915C02 for 2004, MP117424C01 for 2005, MS728712C01 for 2006, MN203410C01 for 2007, and MP778512C01 for 2008 to the department for reassessment according to the conclusions set forth in paragraphs 17 to 19 and 194 to 196 of this judgment;

The whole, with legal costs in favour of the defendant; In file 500-80-029854-149: DISMISSES the appeal; The whole, with legal costs in favour of the defendant. __________________________________ DANIEL BOURGEOIS, J.C.Q. Mtre Pierre-Olivier Martel Mtre Michel Larouche LAROUCHE ET ASSOCIÉS AVOCATS INC. Counsel for the plaintiff Mtre Marc Lesage Larivière Meunier Counsel for the defendant Dates of hearing: May 21 to 24, 2019 May 27 to 30, 2019