Executive summary: Key legal and evidentiary issues

• Disputed fair market values of Lots 243 and 252 transferred from corporation 9134 to its sole shareholder, Daniel Touchette, triggered reassessments for unreported income and shareholder benefits under subsection 15(1) of the Income Tax Act.

• Appellants failed to establish that ownership of the lots transferred in July 2009 rather than the dates reflected in the notarial deeds (January and April 2010), as Mr. Touchette's uncorroborated testimony was insufficient to contradict the authentic instruments.

• Numerous infrastructure and equipment expenses claimed by 9134 were disallowed on the basis that they constituted personal expenditures benefiting Mr. Touchette's integrated real estate project rather than the Joint Venture's business.

• Input tax credits included in 9134's income under paragraph 12(1)(x) of the ITA were reversed by the Court, which found the CRA's treatment inconsistent with the proper application of that provision and subsection 248(16).

• Penalties for gross negligence under subsection 163(2) were cancelled in their entirety, as the respondent did not present sufficiently convincing evidence of deliberate conduct or indifference to compliance with the law.

• Partial success was achieved by both sides, resulting in reduced reassessment amounts and no award of costs to either party.

Background and the parties involved

Daniel Touchette, a land surveyor by profession, is the sole shareholder and director of 9134-3822 Québec Inc. ("9134"), a Canadian-controlled private corporation operating in the real estate sector. Together with his business partner Michel Leclerc—who wholly owned the shares of 2849-8541 Québec Inc. ("2849")—Mr. Touchette operated a joint venture known as Le Faubourg de la Renaissance (the "Joint Venture") in the municipality of Granby, Quebec. The Joint Venture's core activities involved acquiring land, obtaining regulatory approvals, subdividing lots, constructing street infrastructure, and selling the developed lots primarily to construction contractors. Alongside this corporate venture, Messrs. Touchette and Leclerc personally pursued an adjacent residential development project that included the construction of a private street and buildings on several lots, including Lots 243, 252, and 253.

The CRA audit and reassessments

The overlapping nature of the corporate and personal projects—featuring shared suppliers, related-party transactions, and similar expenses—prompted a review by the Canada Revenue Agency ("CRA"). The Minister of National Revenue issued reassessments against Mr. Touchette for his 2010 and 2011 taxation years, and against 9134 for its fiscal years ending March 31, 2011, 2012, and 2013. The reassessments addressed several categories of adjustments: unreported income arising from the transfer of Lots 243 and 252 at below-market value, shareholder benefits under subsection 15(1) of the Income Tax Act related to the lot transfers and expenses paid by 9134 for Mr. Touchette's personal benefit, disallowed business expenses, inclusion of input tax credits in income under paragraph 12(1)(x), and penalties for gross negligence under subsection 163(2).

The dispute over lot transfer dates and market values

A central issue was whether the transfer of Lots 243 and 252 from 9134 to Mr. Touchette occurred in July 2009, as the appellants contended, or on the dates recorded in the notarial deeds—January 14, 2010, for Lot 243 and April 16, 2010, for Lot 252—as the respondent maintained. The appellants argued that an oral promise of sale had been made in July 2009, accompanied by delivery and actual possession, thereby making the promise equivalent to a sale under article 1710 of the Civil Code of Québec. However, the Court found Mr. Touchette's testimony unconvincing and entirely uncorroborated. His co-owner, Mr. Leclerc, did not testify. No written promise to purchase existed for these lots, and the notarial deeds explicitly stated that the purchaser became the owner from the date of the deed and that no prior legal relationship existed between the parties. Importantly, the same notary had, in the earlier notarial deed for Lot 253 executed in July 2009, referenced a preliminary agreement—demonstrating that when such arrangements existed, the parties disclosed them. The Court accepted the dates in the notarial deeds as reflecting the true intention of the parties.

Fair market value determination

Having established the transfer dates, the Court turned to the fair market value of the lots. The respondent conceded the market values determined by the appellants' certified appraiser, Lise Fortin: $74,500 for Lot 243 and $138,000 for Lot 252. This represented a significant reduction from the CRA's fair market values of $116,000 and $204,854 respectively. As a result, the undeclared income was revised from $108,504 to $54,328. Mr. Touchette attempted to argue for even lower values by factoring in backfilling costs, but the Court was not persuaded because his testimony lacked documentary support, the costs were not clearly allocated between the lots, and his own appraiser's reports maintained the higher values despite acknowledging the owner's position.

Disallowed expenses and their treatment

The second major area of dispute concerned infrastructure and equipment expenses claimed by 9134. The appellants relied on a straightforward rule: invoices dated before November 29, 2011 (the date Protocol 2011 was signed for the private street) related to Protocol 2009 and were legitimate business expenses, while invoices after that date were personal. The Court examined each category of expense individually. For the $40,000 machinery rental invoice from Construction Michel Leclerc, the Court found the explanations too vague and general, particularly given the dependent relationship between the contracting parties and the concurrent personal development work. For the Bertrand Ostiguy Inc. invoices involving sand transport and compactor work, the evidence was too unclear to determine whether the services benefited the Joint Venture or the personal project. However, the Court allowed deductions for invoices from Les Entreprises Choinière (sand deliveries), Wolseley Canada Inc. and Groupe Gaston Côté (pipes), certain professional fees (surveying and notary), and a City of Granby invoice—all of which were unchallenged during cross-examination. Engineering invoices from Teknika HBA were disallowed as more logically connected to the forthcoming Protocol 2011. Expenses relating to the Excavator 320 (fuel, insurance, maintenance) were also disallowed, as the Court found Mr. Touchette's claim that the equipment was never used on personally owned lots unconvincing.

Input tax credits and paragraph 12(1)(x)

The Court conducted a detailed analysis of whether input tax credits ("ITCs") claimed by 9134 on the disallowed expenses should be included in income under paragraph 12(1)(x) of the Income Tax Act. While accepting that subsection 248(16) deems ITCs to be government assistance, the Court concluded that paragraph 12(1)(x) could not apply in the circumstances because the GST had not been claimed as part of the expense for income tax purposes—it had instead been claimed as an ITC. The total amount of the ITC effectively reduced the expense amount for Part I purposes, meaning subparagraph 12(1)(x)(vi) was not satisfied. The Court found that the CRA's approach of selectively including ITCs only on disallowed expenses was problematic and that any review of ITC entitlement properly belonged under the Excise Tax Act, not the Income Tax Act. Accordingly, the ITC inclusions of $10,066 for 2011 and $6,503 (revised to $2,501) for 2012 were reversed entirely.

Penalties for gross negligence

The respondent bore the burden of proving that penalties under subsection 163(2) were justified. The Court applied the well-established principles from the Venne, Wynter, and Guindon decisions, recognizing that gross negligence requires more than ordinary carelessness—it demands a high degree of negligence tantamount to intentional action or indifference to compliance with the law. The CRA auditor's testimony was brief and generalized, offering little specific evidence of serious misconduct. The Court noted that bookkeeping was adequate, invoices were available and auditable, no mention was made of wrongdoing or misleading accounting entries, and there was no situation where evidence or conduct was concealed. While the magnitude of the disallowed expenses was significant, the Court held that this factor alone could not sustain a finding of gross negligence. The respondent also failed to establish subjective knowledge or willful blindness on the part of the appellants. Consequently, all penalties were cancelled.

The ruling and overall outcome

On December 22, 2025, the Honourable Judge Jean Marc Gagnon allowed the appeals in part, without costs, and referred the reassessments back to the Minister of National Revenue for reconsideration. For Mr. Touchette's 2010 taxation year, the undeclared income inclusion was reduced from $108,504 to $54,328 and the shareholder benefit from $88,433 to $60,051. For 2011, his shareholder benefit was reduced from $53,206 to $15,968. For 9134's fiscal year ending March 31, 2011, the undeclared income was similarly reduced to $54,328, disallowed expenses were reduced from $79,878 to $61,583, and the ITC inclusion of $10,066 was eliminated. For the fiscal year ending March 31, 2012, disallowed expenses were reduced from $46,703 to $15,968 and the ITC inclusion of $6,503 was eliminated. The 2013 fiscal year's non-capital loss carryforward was revised accordingly. All penalties under subsection 163(2) were cancelled across all taxation years for both appellants. The success of the appeals was shared between the parties, and no costs were awarded to either side—a result reflecting the mixed nature of the outcome, where neither the appellants nor the respondent prevailed on all issues.