Bonhomme v. The Queen

Bonhomme v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-06-14
Neutral citation
2016 TCC 152
File numbers
2011-771(IT)G, 2012-3192(IT)G
Judges and Taxing Officers
David E. Graham
Subjects
Income Tax Act
Decision Content
Docket: 2011-771(IT)G
BETWEEN:
JANICE BONHOMME,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Janice Bonhomme 2012-3192(IT)G on November 9, 10, 12 and 13, 2015 and April 18, 19, 20 and 21, 2016, at Toronto, Ontario
Before: The Honourable Justice David E. Graham
Appearances:
Counsel for the Appellant:
Richard A. Pharand
Counsel for the Respondent:
John Grant
JUDGMENT
The Appeal of the Appellant’s 2001 to 2005 taxation years made under the Income Tax Act is allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the subsection 15(1) benefits assessed against the Appellant in respect of her use of a house in 2001, 2002, 2003, 2004 and 2005 be reduced by $11,987, $16,460, $21,405, $20,620 and $20,272 respectively.
Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 14th day of June, 2016.
“David E. Graham”
Graham J.
Docket: 2012-3192(IT)G
BETWEEN:
JANICE BONHOMME,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Janice Bonhomme 2011-771(IT)G on November 9, 10, 12 and 13, 2015 and April 18, 19, 20 and 21, 2016, at Toronto, Ontario
Before: The Honourable Justice David E. Graham
Appearances:
Counsel for the Appellant:
Richard A. Pharand
Counsel for the Respondent:
John Grant
JUDGMENT
The Appeal of the Appellant’s 2006 to 2009 taxation years made under the Income Tax Act is dismissed.
Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 14th day of June, 2016.
“David E. Graham”
Graham J.
Citation: 2016TCC152
Date: 20160614
Dockets: 2012-3192(IT)G
2011-771(IT)G
BETWEEN:
JANICE BONHOMME,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1] Janice Bonhomme is the sole shareholder, director and officer of 1218395 Ontario Inc. (“121”). Over the years, both Ms. Bonhomme and 121 have been involved in various capacities in the mining industry. The Minister of National Revenue reassessed Ms. Bonhomme’s 2001 to 2005 tax returns to include what the Minister alleges were $666,176 in shareholder benefits from 121 in Ms. Bonhomme’s income. The Minister assessed gross negligence penalties in respect of some of those benefits. The Minister also reassessed Ms. Bonhomme’s 2006 to 2009 tax years to deny $430,000 in Canadian exploration expenses that Ms. Bonhomme had claimed in those years. Ms. Bonhomme appealed the two sets of reassessments. The Appeals were heard on common evidence but I will address them separately in these reasons[1].
I. 2001 to 2005 Tax Years [2] The alleged shareholder benefits that the Minister included in Ms. Bonhomme’s income consisted of two categories: unexplained deposits to Ms. Bonhomme’s personal bank accounts and shareholder benefits in respect of the occupancy by Ms. Bonhomme and her family of a house owned by 121.
[3] The issues in respect of 2001 to 2005 are:
(a) whether the unexplained deposits to Ms. Bonhomme’s bank account represent unreported income;
(b) whether any unexplained deposits that occurred in Ms. Bonhomme’s otherwise statute barred 2001 and 2003 tax years can be assessed;
(c) whether gross negligence penalties were properly applied to some of the unexplained deposits;
(d) whether Ms. Bonhomme had a housing benefit from her occupancy of the house owned by 121 and, if so, the amount of that benefit; and
(e) whether any such housing benefit that occurred in Ms. Bonhomme’s otherwise statute barred 2001 and 2003 tax years can be assessed.
[4] I conclude that the Minister properly included the unexplained deposits in Ms. Bonhomme’s income, that the deposits that occurred in 2001 and 2003 can be assessed and that gross negligence penalties were appropriately applied. I also conclude that Ms. Bonhomme had housing benefits from her occupancy of the house, although not in the amounts assessed by the Minister. Finally, I conclude that the housing benefits that occurred in 2001 and 2003 can be assessed, although also not in the amounts assessed by the Minister.
A. Unexplained Deposits [5] The Minister conducted a bank deposit analysis of Ms. Bonhomme’s accounts for her 2001 to 2005 tax years. A bank deposit analysis is an alternative method of determining income that is sometimes used by the Minister when the Minister believes that a taxpayer’s records are an inadequate means of verifying the taxpayer’s income. A bank deposit analysis generally involves reviewing each deposit that a taxpayer has made to his or her bank account in excess of a certain amount. The Minister asks the taxpayer to explain the source of each of those deposits. To the extent that the taxpayer either cannot explain the source, provides an explanation that the Minister does not accept or admits that the source is taxable and was not reported, the Minister includes the deposit in the taxpayer’s income. If the taxpayer is able to satisfy the Minister that a given deposit comes from a non-taxable source or has already been reported in the taxpayer’s income, the Minister ignores the deposit.
[6] The CRA auditor who audited Ms. Bonhomme’s 2001 to 2005 tax years testified on behalf of the Respondent[2]. I found him to be a credible witness. He provided a detailed description of how he conducted the bank deposit analysis of Ms. Bonhomme’s 2001 to 2005 tax years. There is no need for me to repeat that description here. I found that the process that the auditor followed was consistent with the foregoing description of a typical bank deposit analysis. I also found him to have taken the normal and correct steps to ensure that there was no double counting, that all deposits from identifiable non-taxable sources had been removed and that all deposits from identifiable taxable sources that had previously been reported as income had also been removed.
[7] The auditor divided the deposits for which he had not received a suitable explanation into four categories:
(a) amounts that were recorded as “credit memos” in Ms. Bonhomme’s bank account;
(b) amounts that Ms. Bonhomme appeared to have received from a company known as Explorers Alliance Corporation (“EAC”);
(c) other deposits over $5,000; and
(d) 50% of all other deposits between $1,000 and $5,000[3].
[8] The Minister treated these unexplained deposits as amounts that Ms. Bonhomme had appropriated from 121 and thus assessed her pursuant to subsection 15(1). The Minister applied gross negligence penalties to the first three categories.
[9] There are two primary ways in which a taxpayer can challenge a bank deposit analysis. The first is to prove that his or her records were adequate and thus that his or her income should have been determined using those records. The second, and more common method, is to show that the unexplained deposits came from a non-taxable source or were already included in income. Ms. Bonhomme took the second approach.
[10] Ms. Bonhomme’s primary position was that most of the unexplained deposits were repayments of her shareholder loan to 121 and thus were not taxable. She also argued that certain specific deposits came from non-taxable sources. Despite my clear suggestion that Ms. Bonhomme should address each of the unexplained deposits individually, she failed to do so. I find that none of the deposits were repayments of Ms. Bonhomme’s shareholder loan and that the deposits that Ms. Bonhomme argues came from other non-taxable sources did not come from those sources.
[11] Before turning to the four categories of unexplained deposits, I will review the quality of the evidence provided by Ms. Bonhomme.
[12] Ms. Bonhomme did not testify in respect of the bank deposit analysis. All evidence in support of her appeal of the bank deposit analysis came from her husband, Lionel Bonhomme. I did not find Mr. Bonhomme’s evidence to be reliable. He spoke in generalities and made sweeping statements that frequently turned out to either be wrong or require significant modification. His testimony was peppered with statements where he mixed up Ms. Bonhomme and 121. There were other occasions where he mixed up himself and Ms. Bonhomme, himself and 121, 121 and EAC, and EAC and other entities. When Mr. Bonhomme referred to documents which were in evidence, I found that he often overstated the nature or content of the documents. Mr. Bonhomme frequently failed to answer questions even when the same question was put to him a number of times. While it was sometimes difficult to tell whether he was being evasive or simply had difficulty staying on track, it was clear that he was being deliberately evasive on many of the more important questions. The way in which Mr. Bonhomme spoke in generalities and confused parties allowed him to change what appeared to have previously been his story without outright contradicting himself. That said, there were a number of occasions where he did contradict himself. As a result of all of the foregoing, I have given little weight to Mr. Bonhomme’s testimony where it is not supported by documentary evidence.
[13] Despite the fact that he has a great deal of accounting experience, Mr. Bonhomme did not maintain books and records for 121. No contemporaneous accounting records were kept. When faced with a court order to file its late income tax returns, 121 prepared those returns using trial balances that did not reflect the company’s actual transactions. The trial balances were prepared on a cash basis rather than an accrual basis. They do not reflect $290,000 in income that Mr. Bonhomme testified 121 had received from August 2003 to December 2005[4]. With one exception in 2002, there are no debits to the shareholder loan account. In other words, all but one of the unexplained deposits that Mr. Bonhomme says were repayments of Ms. Bonhomme’s shareholder loan are not reflected as such on the trial balances. In addition, the trial balances do not reflect $339K that EAC owed 121, amounts owing on 121’s line of credit, interest expenses purportedly incurred by 121 in respect of interest payable to Ms. Bonhomme, and interest income purportedly earned by 121 on amounts owing to it by EAC. There is no change in 121’s “loans and notes receivable” balance from 1997 to 2005 despite the fact that Mr. Bonhomme claims 121 was advancing funds to and/or making reimbursable expenditures on behalf of EAC during this period. Finally, all adjustments to the shareholder loan account on the trial balances are clearly made as a result of plugs rather than through any actual recording of the relevant transactions.
[14] Mr. Bonhomme provided various poor explanations for the foregoing lack of detail. His primary explanation was that, faced with a court order to file its tax returns, 121 had tried to focus on the income statement aspects of the reporting rather than the balance sheet aspects. I do not accept this explanation. If 121 were truly focused on the income statement aspects of its reporting, then why did it fail to report the $290,000 in income it received from EAC? Mr. Bonhomme’s explanation that 121 did not need to do so because EAC had renounced offsetting Canadian exploration expenses to 121 rings hollow. That could be an explanation of why 121 did not think it owed any tax but would not be an explanation of why it did not record its revenues. The company managed to bookkeep its expenses despite the fact that it did not think it owed any tax. It seems a bit too convenient that it happened to overlook reporting substantially all of its revenue.
[15] Even if I accepted Mr. Bonhomme’s explanations of 121’s accounting, I do not know how I could rely on trial balances prepared without regard for balance sheet items. If the balance sheet does not reflect the money that 121 took from its line of credit, then how can I possibly be confident that various expenditures were paid through the shareholder loan as opposed to through the line of credit? If the balance sheet does not reflect accounts payable, then how can I be sure that expenses claimed were actually paid through the shareholder loan rather than simply remaining unpaid at the end of a given year?
[16] Mr. Bonhomme provided the auditor with what he described as a reconciliation of the shareholder loan account[5]. He started with the closing balance of the account in 1997 and made adjustments to the account going forward to 2005. Ms. Bonhomme relied on this reconciliation at trial as supposed proof that, at all times, the shareholder loan account was in a credit balance and thus she had not appropriated funds from 121. I do not accept that the reconciliation shows this for a number of reasons.
(a) Like other spreadsheets prepared by Mr. Bonhomme that were entered into evidence at trial, the reconciliation appears to me to represent what Mr. Bonhomme wishes or believes the facts to be as opposed to a summary of a careful analysis of what the underlying facts and documents have shown.
(b) The shareholder loan balance is increased by various amounts described as “advances”. I was not provided with any documentary evidence that those advances were made.
(c) The actual adjustments to the shareholder loan that appear in the trial balances have not been included in the reconciliation. Instead, Mr. Bonhomme has simply taken the loss reported by 121 each year and, on the assumption that the loss was financed by the shareholder loan account, credited that loss to the shareholder loan account. He did this despite the fact that the loss included amortization -- a non-cash item that could not possibly have impacted the shareholder loan.
(d) The shareholder loan balance is increased by amounts described as “interest”. My understanding is that these amounts are supposed to represent interest that 121 owed to Ms. Bonhomme on amounts borrowed by her. Mr. Bonhomme made repeated reference to a director’s resolution that purportedly authorized 121 to pay interest to Ms. Bonhomme at 18% until such time as Ms. Bonhomme’s shareholder loan balance was nil or her personal credit cards were paid off. My understanding was that 18% was to represent the interest rate paid by Ms. Bonhomme on her credit cards. No copy of the resolution was entered into evidence. No copies of Ms. Bonhomme’s credit card statements showing her outstanding balances were entered into evidence. No calculation showing how the amount of interest was determined was entered into evidence. Ms. Bonhomme did not report the interest in question as income on her tax returns.
(e) Most importantly, the reconciliation is simply a reconciliation of one account in the abstract. It does nothing to address the overall concerns that I have with the trial balances. It is still not a full accounting. Whatever time pressures 121 faced to get its tax returns filed, it has had years since then to create a proper set of accounting records that could be relied upon. I draw an adverse inference from its failure to do so.
[17] The following is an analysis of each of the four categories of unexplained deposits identified by the auditor.
(1) Credit Memos [18] The auditor testified that the amounts identified as “credit memos” on Ms. Bonhomme’s bank account statements were transfers from other accounts or banks. He explained that he had eliminated all credit memos that related to transfers from Ms. Bonhomme’s own accounts and those of her family and had been left with $268,470 in unexplained credit memos. He stated that he was unable to determine exactly where those amounts came from but that he thought they may have originated from EAC due to some information he had received from Ms. Bonhomme[6]. I find that the Minister properly included all of these amounts in Ms. Bonhomme’s income.
[19] Many of the credit memos involved deposits of two specific amounts: $4,990 and $9,990. Mr. Bonhomme explained that those deposits represented deposits of $5,000 or $10,000 from EAC less a $10 transfer fee. Some background is needed to understand Mr. Bonhomme’s explanation of these deposits. Ms. Bonhomme was a shareholder of EAC until sometime in the early 2000’s. As of 2001, Ms. Bonhomme was owed $157,000 by EAC and 121 was owed $339K by EAC. In 2003, EAC found itself in financial difficulty. A Statement of Claim was filed by 121 and 121 succeeded in obtaining a Writ of Seizure and Sale. EAC then entered into what Mr. Bonhomme described as a “private creditor arrangement” with its creditors including Ms. Bonhomme and 121. Mr. Bonhomme explained that, despite its bleak financial situation, there was still work that needed to be done in respect of EAC’s mining interests in order to preserve those interests. He testified that, as a result, EAC entered into an agreement with Ms. Bonhomme and 121 whereby one or both of Ms. Bonhomme and 121 would provide services to EAC in exchange for a “management fee, a consulting fee” of $10,000 per month[7]. Mr. Bonhomme stated that those monthly payments were to be matched by renunciations of $10,000 in Canadian exploration expenses each month by EAC to whomever had provided the services[8].
[20] Aside from Mr. Bonhomme’s testimony, the only evidence of this purported agreement came from a document described as being minutes of a meeting held on August 12, 2003. The entire agreement is described as follows[9]:
“It was agreed that 1218395 Ontario Inc arrange for the services and take the necessary steps and the payments of exploration and other work have the flow thru credits renounced In her company or herself as required .
This consideration was crucial due the amounts owed to her company and herself.” [sic throughout]
[21] The minutes are unsigned. They make no reference to the payment of any money let alone $10,000 per month. They refer to renunciations but do not specify the amount of such renunciations.
[22] Ms. Bonhomme did not call either of the other people supposedly present at the meeting as witnesses. I draw an adverse inference from this fact. I specifically note that one of these individuals was the president of EAC, Jean Claude Bonhomme. Jean Claude Bonhomme is Mr. Bonhomme’s cousin. He resides in Toronto where the trial was held.
[23] Mr. Bonhomme testified that 121 provided services pursuant to this purported agreement from August 2003 until December 2005 and that Ms. Bonhomme provided the services from January 2006 to July 2009.
[24] Mr. Bonhomme’s testimony on these payments was inconsistent. He testified that EAC paid $10,000 each month. When confronted with the actual list of unexplained credit memos, he changed his testimony to state that a number of the first payments had actually been for only $5,000. Mr. Bonhomme also testified that the payments were made promptly each month yet there are some months where there is no deposit.
[25] Mr. Bonhomme testified that the $10,000 per month in payments made to 121 pursuant to this purported agreement were deposited to Ms. Bonhomme’s personal bank account due to the fact that 121 did not have a bank account in the years in question. He stated that 121 treated the deposits as repayments of Ms. Bonhomme’s shareholder loan and thus that they should not have been taxable in Ms. Bonhomme’s hands. I do not accept this explanation. 121 did not report these amounts as revenue on its tax returns nor did it record them as credits to Ms. Bonhomme’s shareholder loan account. The money simply went from EAC into Ms. Bonhomme’s account without ever being recorded or reported by either 121 or Ms. Bonhomme. Mr. Bonhomme’s explanation is nothing more than a description of what, in retrospect, he wishes had happened.
[26] Based on all of the foregoing, I conclude that the credit memos for $4,990 and $9,990 were amounts that Ms. Bonhomme appropriated from 121.
[27] There were five credit memos for $4,990 that were deposited in the months prior to the purported agreement among EAC, 121 and Ms. Bonhomme. Mr. Bonhomme provided a variety of explanations of what these amounts were. No documentary evidence was filed to support any of these explanations. I find it difficult to believe Mr. Bonhomme’s explanation that these credit memos were somehow different from the identical ones that followed. Accordingly, I find that they were payments made by EAC to 121 that were appropriated by Ms. Bonhomme.
[28] Mr. Bonhomme testified that one deposit of $10,990 and one deposit of $11,590 were combinations of the $10,000 per month payments to 121 and reimbursements by EAC of amounts that 121 or Ms. Bonhomme had spent on EAC’s behalf. He identified other deposits of $6,190 and $6,490 which he said were combinations of the $5,000 per month payments to 121 and reimbursements. He also testified that a deposit of $3,990 was simply a reimbursement. No documentary evidence was filed to support any of these assertions. I am not prepared to accept them simply based on Mr. Bonhomme’s testimony. I find that all of these amounts were payments made by EAC to 121 that were appropriated by Ms. Bonhomme.
[29] Mr. Bonhomme testified that two other credit memos for $7,990 and $4,990 may have been transfers from one of Ms. Bonhomme’s brokerage accounts but he made no attempt to actually trace the transfers through the brokerage accounts. I am not prepared to accept this assertion solely based on Mr. Bonhomme’s testimony.
[30] Mr. Bonhomme testified that an $18,990 credit memo was a payout from Ms. Bonhomme’s automobile insurance company in respect of a car accident. Again, Mr. Bonhomme failed to provide supporting documentary evidence or a plausible explanation of why the day after this credit memo was deposited, the insurance company would issue a cheque, rather than a further credit memo, to Ms. Bonhomme for $19,309.76 (an amount accepted as non-taxable by the auditor). I am not prepared to accept that the $18,990 is non-taxable simply based on Mr. Bonhomme’s testimony.
[31] There were two additional credit memos ($2,990 and $4,490) about which Mr. Bonhomme provided no testimony.
[32] Based on all of the foregoing, I find that the $268,470 in credit memos were appropriations that Ms. Bonhomme made from 121 and were correctly included in her income.
(2) Amounts from Explorers Alliance Corporation [33] The auditor included $72,629 in Ms. Bonhomme’s income on account of various amounts that he described as “consulting fees and EAC interest”
[34] Ms. Bonhomme stated in a fax sent to the auditor that the “amount of $72,629 consists mainly of interest payment [sic] on the 339 k” [10]. The phrase “339 k” refers to the $339,000 that EAC owed to 121. This explanation is completely inconsistent with the following explanations that Mr. Bonhomme offered at trial[11].
[35] There are eight deposits in this category. The first five deposits total $32,990. Mr. Bonhomme acknowledged that these deposits were all from EAC. In his direct testimony he explained that these deposits were payments made to Ms. Bonhomme to cover the costs of an employee of 121[12]. I do not accept Mr. Bonhomme’s explanation. I note that 121’s trial balance for 2001 shows that a total of $0.20 was spent on salaries in that year. On cross-examination Mr. Bonhomme provided a completely different explanation. He initially stated that these deposits were consulting fees and then changed his mind and described them as reimbursements of expenditures that 121 had made on behalf of EAC[13]. No documents were filed either evidencing the amounts expended, the invoicing of those amounts or how the five totals were determined. These disbursements were not recorded in the trial balances (either as expenses offset by revenue upon repayment or as short term loans that were repaid). Similarly, there was no entry on the shareholder loan account to record the receipt of these amounts. Accordingly, I do not accept Mr. Bonhomme’s alternate explanation either. I find that these five deposits were interest payments made to 121 by EAC that were not reported by 121 and were appropriated by Ms. Bonhomme.
[36] The sixth deposit was for $26,213. Ms. Bonhomme took the position that this deposit was a repayment of her shareholder loan. Mr. Bonhomme testified that 121 had refinanced its mortgage in 2002 and that this amount represented the proceeds that were left after the refinancing. The trial balance for 2002 does show a repayment of the shareholder loan in relation to the refinancing but that repayment is for $35,288. Mr. Bonhomme did not explain why the deposit to Ms. Bonhomme’s bank account would differ from the amount of the debit to the shareholder loan account. The $26,213 figure was described in Mr. Bonhomme’s deposit spreadsheet as “interest EAC”[14] and, as set out above, was described in the fax to the auditor as interest. I find that this deposit was an interest payment made to 121 by EAC that was not reported by 121, is not related to the $35,388 recorded repayment of the shareholder loan account and was accordingly appropriated by Ms. Bonhomme.
[37] The seventh deposit was for $5,426. Mr. Bonhomme initially took the position that that amount was never deposited to Ms. Bonhomme’s bank account and that it instead represented interest charged to 121 by its bank on its line of credit[15]. This amount does appear on the 2002 trial balance as an expense incurred by 121 under the description “interest and bank charges”. However, when it was drawn to Mr. Bonhomme’s attention that the same amount had been deposited in January 2003[16], he changed his testimony and described the deposit as being a reimbursement for delivering drill cores or drill bits on behalf of EAC and stated that it was a coincidence that it was the same amount as the interest on the line of credit[17]. Based on the trial balance entry and the fax originally sent to the auditor, I find that the deposit was a reimbursement by EAC of interest that 121 had incurred on its line of credit and that the deposit was appropriated by Ms. Bonhomme.
[38] Mr. Bonhomme testified that he could not recall what the remaining $8,000 deposit was. He suggested that it may have been a loan made to Ms. Bonhomme or proceeds from the sale of shares[18]. In light of the fax sent to the auditor and my conclusions in respect of the other amounts in this category, I find that it was an interest payment from EAC to 121 that was appropriated by Ms. Bonhomme.
[39] Based on all of the foregoing, I find that all of the $72,629 in deposits were appropriations that Ms. Bonhomme made from 121 and that they were correctly included in her income.
(3) Deposits of $5,000 or more [40] The auditor included $131,749 in Ms. Bonhomme’s income in respect of other unexplained deposits of $5,000 or more.
[41] Mr. Bonhomme provided very little oral testimony to support Ms. Bonhomme’s position that these amounts were not appropriations from 121. This was true despite the fact that I made it very clear to Ms. Bonhomme that, if she wanted to succeed in her appeal, she needed to focus on identifying the source of each unexplained deposit.
[42] There are six deposits of $10,000 each. Mr. Bonhomme suggested that some of those deposits may have been $10,000 per month payments from EAC that were paid by cheque rather than credit memo. To the extent that Mr. Bonhomme’s explanations regarding repayments of Ms. Bonhomme’s shareholder loan were intended to cover those or any other deposits in this category, I reject the explanations for the same reasons set out above.
[43] The only item in this category that Mr. Bonhomme specifically identified was a $20,000 deposit that he says was a loan from a colleague that he played poker and blackjack with. That colleague was not called as a witness. I draw an adverse inference from that fact.
[44] Mr. Bonhomme testified that various other amounts had also been lent to Ms. Bonhomme in the years in question but did not specifically identify any of the deposits as representing those amounts. I find that none of the deposits of $5,000 or more was a loan. Four documents that Mr. Bonhomme said supported the loans were entered into evidence.
(a) The first document was a handwritten letter on the letterhead of a company called Colbert Drilling and Exploration Co[19]. The letter was dated after the audit began. It is internally inconsistent. It describes an outstanding loan of $16,000 “payable to Colbert Drilling from 1218395 Ont. Inc.” and then in the next line states that “[t]hese monies were loaned to Janice Bonhomme for her Comanpy”. Mr. Colbert was not called as a witness. I draw an adverse inference from that fact.
(b) The second document is a handwritten list purporting to show amounts owing and repaid[20]. It appears that the total amount lent was $40,500. Mr. Bonhomme testified that this document related to a loan made personally by Mr. Colbert. The document is unsigned. The borrower is described as Mr. Bonhomme not Ms. Bonhomme. Again, I draw an adverse inference from the fact that Mr. Colbert was not called as a witness.
(c) The third document is a list of amounts purportedly lent to Ms. Bonhomme by Mr. Bonhomme’s cousin, Jean Claude Bonhomme[21]. The document is unsigned. The document shows the dates that various amounts were supposedly advanced. Mr. Bonhomme did not tie those amounts into the unexplained deposits. There is only one amount that I can easily see ties into the unexplained deposits. The auditor already recognized that amount as being non-taxable[22]. Again, Jean Claude Bonhomme was not called as a witness. I draw an adverse inference from that fact.
(d) The last document was a list of loans prepared by Mr. Bonhomme during the audit[23]. A list of loans prepared by a witness is hardly evidence of those loans being made. There were no documents entered into evidence to support these loans other than those already described above and the lenders were not called as witnesses[24]. The list combines amounts lent to 121 with amounts lent to Ms. Bonhomme. The list cannot be readily reconciled to the unexplained deposits and Mr. Bonhomme made no attempt to do so in his testimony. I have no way of knowing whether the amounts described thereon have or have not been included in the list of unexplained deposits. The list includes the $20,000 loan described above. The purported $16,000 loan from Colbert Drilling is shown as a loan from Mr. Colbert. There is no reference at all to the $40,500 loan advanced by Mr. Colbert personally. The list also includes various amounts on credit cards. There was no evidence indicating whether the credit card amounts were cash advances or simply an accumulation of purchases.
[45] Based on all of the foregoing, I find that the $131,749 in unexplained deposits of $5,000 or more were appropriations that Ms. Bonhomme made from 121 and were correctly included in her income.
(4) Deposits between $1,000 and $5,000 [46] The auditor included $68,362 in Ms. Bonhomme’s income in respect of other unexplained deposits between $1,000 and $5,000. The auditor found $136,726 in such deposits but chose to include only 50% of them in Ms. Bonhomme’s income. I find his decision to be reasonable.
[47] Despite my recommendation to the contrary, Ms. Bonhomme provided no oral or documentary evidence of why any of these amounts should not be included in her income. To the extent that the explanations regarding loans from third parties or repayments of shareholder loans were intended to cover these deposits, I reject them for the same reasons set out above.
[48] Based on all of the foregoing, I find that the $68,362 in unexplained deposits were appropriations that Ms. Bonhomme made from 121 and were correctly included in her income.
(5) Statute barred years [49] Ms. Bonhomme’s 2001 and 2003 tax years are statute barred. Thus, for those years, I must determine whether Ms. Bonhomme made misrepresentations in not reporting the deposits to her bank account as income and whether those misrepresentations were attributable to carelessness, neglect or wilful default.
[50] I have no problem finding that Ms. Bonhomme made misrepresentations in not reporting the 2001 and 2003 deposits in her tax returns. Given the lack of proper books and records, I find that it was appropriate for the auditor to conduct a bank deposit analysis. That analysis revealed significant amounts of unexplained deposits. Ms. Bonhomme reported only $1,472 in income in 2001. The Minister included a further $76,210 in Ms. Bonhomme’s income as a result of the bank deposit analysis. Ms. Bonhomme reported $34,349 in income in her 2003 tax year. The Minister included a further $91,557 in Ms. Bonhomme’s income as a result of the bank deposit analysis. As set out in detail above, I do not accept Ms. Bonhomme’s explanations of why these amounts should not be treated as income. Faced with significant unexplained deposits, identifiable sources of income that could have given rise to those deposits and no plausible alternative explanation for the deposits, it is appropriate to conclude that Ms. Bonhomme made misrepresentations by not including those amounts in her income[25].
[51] It would be difficult to describe Ms. Bonhomme as being diligent in respect of her tax affairs from 2001 to 2005. At best she was indifferent as to whether she complied with her tax obligations or not. Her 2001 tax return was the only return that she filed on time during this period. Her 2003 tax return was not filed until 2005. Her 2002, 2004 and 2005 tax returns were not filed until 2007. Ms. Bonhomme deposited amounts belonging to 121 into her personal bank account in 2001 and 2002. In late 2002, the company bank account was closed and all of 121’s banking from that point forward was carried on through Ms. Bonhomme’s personal account. No plausible explanation was provided for why this occurred. Despite the mingling of the accounts, no records were maintained to trace the source of deposits. Ms. Bonhomme was the sole director, officer and shareholder of 121. In order for Ms. Bonhomme to properly file her 2001 to 2005 tax returns, she needed to keep proper books and records for that company. She did not do so. She did not cause 121 to maintain contemporaneous books and records. Ms. Bonhomme pled guilty in the Ontario Court of Justice to failing to file tax returns for 121 in breach of a requirement to do so. The returns that were filed were prepared based on only partial information and failed to reflect significant sources of income that Ms. Bonhomme asserts were received by 121. Ms. Bonhomme maintains that much of the money that she received from 121 was a repayment of her shareholder loan yet she failed to maintain proper books and records that would have reflected the amount of that loan and the relevant credits and debits thereto.
[52] Based on the foregoing, I find that the Minister has successfully opened Ms. Bonhomme’s otherwise statute barred years in respect of the unexplained deposits.
(6) Gross negligence penalties [53] The Minister assessed gross negligence penalties on the first three categories of unexplained deposits. In total, those three categories represent $472,848 in unreported income that arose between 2001 and 2005. This is a significant amount of unreported income. In that same period, Ms. Bonhomme reported only $101,273 in income. Thus her reported income represents approximately 20% of her total income.
[54] Ms. Bonhomme demonstrated an indifference as to whether she complied with the Income Tax Act or not. As set out above, she was late in filing her returns for four of the five years in question. She comingled her and 121’s affairs unnecessarily. Neither she nor 121 kept proper books and records that would have allowed her to determine her income. She only filed returns for 121 when forced to do so by court order under threat of imprisonment.
[55] At a minimum, Ms. Bonhomme knew that significant amounts of money were being deposited to her personal bank account, that she and 121 were not filing tax returns and that they were being pressured by the Minister to do so. The deposits to which the penalties were applied were not insignificant deposits. With only three exceptions, they were all deposits of $5,000 or more. The primary source of revenue for Ms. Bonhomme and her husband from 2003 to 2005 was the $10,000 per month that was received by 121. Yet neither 121 nor Ms. Bonhomme reported those amounts in their returns. Ms. Bonhomme simply took them along with the other deposits.
[56] Ms. Bonhomme provided very little testimony at trial. She merely stated that she had relied on Mr. Bonhomme to prepare her taxes and trusted that he had done so properly. She suggested that she had not reviewed her returns but had simply signed them[26]. It was clear that Ms. Bonhomme knew little, if anything, about the affairs of 121 let alone her own tax affairs. Mr. Bonhomme controlled everything to do with 121 and Ms. Bonhomme’s interest therein. He was retained by either Ms. Bonhomme or 121 to provide his services to EAC and others on their behalf. He was paid a small fee for doing so. That said, I am not prepared to allow Ms. Bonhomme to use Mr. Bonhomme as a shield. Her tax returns and the maintenance of proper books and records for herself and 121 were her responsibilities, not his. Mr. Bonhomme is not an arm’s length accountant who made a mistake that Ms. Bonhomme could not have detected. He is her husband. He has a clear financial interest in her paying less tax. While he has accounting experience and experience in preparing tax returns, he is not a professional and she should not have blindly relied on him. She knew that substantial amounts of money were being deposited to her bank account and that returns were not being filed but she did nothing to ensure that her income was correctly reported.
[57] I also do not accept Ms. Bonhomme’s submission that the entire problem arose because she could not afford to pay an accountant to prepare her and 121’s returns. I think that the entire problem arose because she and her husband chose to use their financial resources to prop up Ms. Bonhomme’s mining investments rather than to comply with their obligations under the Income Tax Act. In essence, Ms. Bonhomme is arguing that, to the extent she earned income but did not report it, she did so because she had already spent it and thus could not afford to hire an accountant. That is not a defence.
[58] Based on all of the foregoing, I find that the gross negligence penalties imposed by the Minister were appropriate.
B. Housing Benefits [59] 121 purchased a three-bedroom raised bungalow in Timmins, Ontario in 1997[27]. Initially the house was used solely for the residential purposes of Ms. Bonhomme and her family. Mr. Bonhomme testified that, beginning in September 2001 and continuing throughout the period in question, 121 began using the basement and the garage for business purposes. Ms. Bonhomme and her family continued to reside in the rest of the house. The Minister assessed Ms. Bonhomme shareholder benefits in respect of her use of the house. I conclude that the amounts assessed should be reduced in each of the years.
[60] The Federal Court of Appeal in Fingold v. The Queen[28] and Youngman v. The Queen[29] established that to determine the value of the benefit from a house, I first have to determine what the benefit is (i.e. what 121 did for Ms. Bonhomme) and then determine what price Ms. Bonhomme would have had to pay, in similar circumstances, to get the same benefit from a company of which she was not a shareholder.
[61] It is clear that the benefit that 121 conferred on Ms. Bonhomme was providing her and her family with a house that they wanted to live in in the town where they wanted to live[30]. The house was purchased by 121 in 1997 as a home for the family. At that time 121 h