Extinctive prescription and the ARQ: recent case law

9 february 2022
by Me Serge Bernier

The Court of Québec recently recalled the principles to be applied in matters of extinctive prescription when the Agence du Revenu du Québec (hereinafter “ARQ”) alleges that a taxpayer has deliberately made false representations.

In 2012, the ARQ carried out a random audit of the tax returns of the corporation Service de collage Montréal (SCM) inc. (hereinafter “SCM”) as well as of the personal tax declarations of its manager, Mr. Nicola Méti. As a result of this audit, the ARQ considers that Mr. Méti, as a shareholder and director of SCM, received taxable benefits as personal expenses which were not declared. Therefore, new notices of assessment were issued by the ARQ several years later, in 2015, to claim several thousand dollars in taxes not paid since 2008. Mr. Méti and SCM initiated legal proceedings to contest these new ARQ assessments.

Before the Court of Québec, whose judgment was rendered in March 2021,¹ the legal debate focused mainly on limitation periods in tax matters in Québec. More specifically, Mr. Méti and SCM claimed that the ARQ could not claim contributions beyond the year 2012.

While under common law most recourses to assert a personal right are barred after three years under article 2925 of the Civil Code of Québec, the Taxation Act contains its own rules on limitation. It is the latter that were the subject of the decision of the Court of Québec, which recalled the terms and application criteria.

Highlights

SCM is a company founded in 1995, working in the field of commercial printing. Mr. Méti is the sole administrator and the first shareholder. The evidence submitted in the file shows that SCM declared several expenses that do not relate to business income.² Some of the expenses declared were Mr. Méti’s personal expenses, and some expenses were not reasonable.³ A non-exhaustive list of several examples is detailed in the decision. It is worth mentioning a few:

– SCM purchases a vehicle for Mr. Méti and deducts all the costs related to the vehicle on the pretext that Mr. Méti needs it to visit customers. However, the company has only three clients, two of which are in the same building as SCM. The Court also notes that Mr. Méti and his spouse did not have a personal vehicle for much of the period for which the expenses were deducted.

– Repair expenses for non-SCM vehicles are deducted.

– Third-party property taxes are paid and deducted by SCM for “services rendered,” all without an invoice. This amount does not appear on the third party’s tax return.

– The reimbursement of Mr. Méti’s personal credit card is deducted by SCM as an expense, although no invoice is produced.

As for Mr. Méti personally, he does not declare any of these benefits received from the company on his tax return.

Claims of the parties

SCM and Mr. Méti mainly base their request, on the one hand, on an irregularity in the processing of their respective file by the ARQ and, on the other, on the limitation on contributions, except for those relating to the year 2012. Regarding the first element, the offenses were first identified , which based its actions on the first checks without taking any additional steps. SCM and Mr. Méti therefore claim that this amounts to a lack of procedural fairness. They cite the Act respecting administrative justice as well as the Charter of taxpayers’ and mandataries’ rights, which provide that the government administration has obligations to act in accordance with standards of ethics and discipline, to demonstrate diligence in decisions that are made, and to treat citizens fairly, equitably, and impartially to support their claims.

Regarding the limitation periods, they claim to have reversed the presumption of validity of the notices of assessment and that the notices of assessment prior to 2012 cannot be the subject of a contribution, as they are prescribed, and the three-year period had expired.

The ARQ, for its part, considers that Mr. Méti received taxable benefits as personal expenses amounting to $284,138 and that he failed to declare them for the tax years in dispute. It relies on section 1010 of the Taxation Act to justify that the contributions are not limited because, according to the ARQ, there were misrepresentations on the part of Mr. Méti and SCM that justify why the limitation does not apply:

1010.

(…)

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 later of the day of sending … of a notice of assessment for a taxation year or of a notice that no tax is payable for a taxation year and the day on which an amended fiscal return for the taxation year is filed;

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; (…)⁴

Analysis of the Court of Québec

1. Irregularity in the processing of the files

The Court rejects the claims of Mr. Méti and SCM concerning the irregularity in the processing of their file. It recognizes the obligations imposed on the ARQ with respect to taxpayers in the audit process but considers that the context in which the reproaches of SCM and Mr. Méti could be raised does not apply in this case. Referring to the consistent jurisprudence on this subject, it points out that the actions of federal or provincial revenue agencies should not be taken into account in the context of an action against a notice of assessment. Rather, it is necessary to refer to the validity of the assessment and not to the process that led to its establishment.⁵

2. Limitation period   

As for the second part of SCM’s and Mr. Méti’s argument, the Court first emphasizes that a tax assessment benefits from a presumption of validity under section 1014 of the Taxation Act, then refers to the Boies⁶ judgment, which summarizes the parties’ burden of proof, both for limited and non-limited periods.

When the assessment is not limited, i.e., when it falls within the three-year period, the presumption of validity of the assessment applies. The ARQ therefore does not have to establish the source of each dollar that passes through the taxpayer’s accounts. It can establish the assessments based on factual assumptions, and it is then up to the taxpayer to prove prima facie (at first sight) that the assumptions of the ARQ are inaccurate. The proof must include a certain degree of probability; therefore, a simple assertion by the taxpayer will generally not be sufficient.

Conversely, when the assessment is limited, it does not benefit from the presumption of validity and the burden of proof is reversed. To issue new assessments, the ARQ must then prove, on a balance of probabilities, that there were false representations made by negligence or wilful omission or that there was a commission of fraud. It should be noted that the misrepresentation does not necessarily have to be fraudulent. “Carelessness” is defined as a “lack of care, negligence, sloppiness.”⁷ It is according to these criteria that the establishment of new assessments for the years preceding 2012 must be established.

The court concludes, based on the facts presented before it, that the ARQ met its burden of proof and that SCM and Mr. Méti deliberately made false representations. The court described the actions of Mr. Méti and, by extension, of SCM as gross negligence.⁸ The ARQ was therefore entitled to establish new assessments beyond the three-year period.

The judge also adds that by having his personal expenses paid by SCM, Mr. Méti received taxable benefits that he did not declare, and that the nature of his expenses was personal. The ARQ was therefore justified in adding them to his personal income.⁹ It is not up to the tax authority to prove when and how a taxpayer has illegally cashed funds from a company of which he is the sole shareholder and director to conclude that the funds have been appropriated.¹⁰

The court therefore concludes that the ARQ has demonstrated on a balance of probabilities that the expenses it refused to SCM were also taxable benefits to be added to the income of Mr. Méti, who falsely represented the facts by wilful omission. It thereby met the criteria to be able to issue new notices of assessment, despite the expiry of the three-year limitation period.

Drafted with the collaboration of Mr. Luc Robitaille, law student. 

 

¹ Service de Collage Montréal (SCM) inc. v. Agence du revenu du Québec, 2021 QCCQ 3889.
² Taxation Act, CQLR, c. I-3, art. 128.
³ Id., art. 133, 134 and 420.
⁴ Taxation Act, CQLR, c. I-3, art. 1010.
⁵ Main Rehabilitation Co. v. Canada, 2004 FCA 403; Le Bouthillier v. Agence du revenu du Québec, 2014 QCCQ 11562.
⁶ Boies v. Agence du revenu du Québec, 2021 QCCA 107.
⁷ St-Martin v. Québec (Sous-ministre du Revenu), 2002 CanLII 4912.
⁸ Service de Collage Montréal (SCM) inc. v. Agence du revenu du Québec, prec., note 1, par. 98.
⁹ Id., par. 76.
¹⁰ Sotiropoulos v. Agence de revenu du Québec, 2018 QCCQ 2889.