Hawrish v. M.N.R., 76 DTC 6455, [1976] CTC 748 (FCA)

Greschuk, DJ:—I agree with the reasons for judgment of the learned Chief Justice with the exception of the excerpts read from the Tax Review Board, the Tax Review Appeal Board, and the judgment of Mr Justice Heald; and that portion of his judgment relating to the matter of penalty.

The learned trial judge held that the claim of the respondent to penalties imposed in respect to unreported legal fees for each of the years 1952-1959 inclusive was justified on the grounds that the appellant wilfully evaded payment of part of his tax. In arriving at this conclusion the learned trial judge cited a number of reasons which can be summarized as follows:

1. That the appellant agreed that he had acquired considerable expertise in the income tax field, as evidenced by his success in a number of cases which he argued before the Tax Appeal Board and the Exchequer Court; and it was curious that he would be so careless and negligent in the maintenance of records and filing of tax returns in so far as his own business was concerned.

2. That the appellant failed to keep a separate trust account at the bank and had only one current account for trust and current items.

3. That he conducted his practice of law in a slipshod manner and appeared by his actions to have contravened the Regulations and Code of Ethics of The Legal Profession Act of Saskatchewan..

4. That against this background he considered a few of the transactions covered by this category as being characteristic of the appellant’s method of operation. In this regard he cited the Campbell, the Pashovitz, and the Victor Yuzak transactions.

5. That as another example he cited the careless and loose way in which the appellant treated and recorded his trust money which he said contributed to the almost impossible task imposed on the tax department in attempting to trace the large volume of transactions, and added immeasurably to the confusion and uncertainty apparent in the appellant’s records.

6. That the appellant issued receipts other than those in the receipt books, which were not reported as income, for example the $15 Roslinski receipt.

7. That it appeared that a figure of $600 in 1956 was changed to $100 and that the appellant did not give any explanation as to why this change was made.

8. That appellant admitted some 24 items in 1955 were omittted from income and the only explanation was that inadvertently the ledger for 1955 was not posted, that is, he forgot to post the trust ledger.

The learned trial judge then said that he did not accept this explanation and further that having regard to the pattern established by the appellant’s course of conduct throughout the period under review, the evidence establishes that said omission was deliberate and wilful on the part of the appellant.

Additionally, the learned trial judge stated in his judgment that the appellant was not able to swear positively that he issued receipts for all cash and cheques received, and that it is clear his books and records do not contain a full report of every transaction, and cited the Gelderbloom estate and the omission among others of a $200 income item.

And finally he said because of the appellant’s course of conduct as above set out he was satisfied that the appellant was guilty of wilful evasion in respect to the unreported legal fees and that the Minister properly assessed the penalty.

It is necessary, before commenting on these findings of fact made by the trial judge, to state that it is always the duty of an appeal court to support the findings of fact of a trial judge if there is evidence in the proceedings to sustain his finding. Equally, however, it is the duty of an appeal court to disagree with such findings if the findings of fact are based on inference and it is the opinion of the appeal court that the irresistible inference to be drawn from the evidence is that the omission to report legal fees was not wilful or deliberate or intentional but was due to the ignorance of the taxpayer of what is required of him, an unorganized and sloppy method of keeping accounts of income and expenditure, poor bookkeeping, failure to keep separate trust and current receipt books and bank accounts, clients’ trust and current ledger cards, and a lack of knowledge of bookkeeping practice and procedures, and particularly a belief on the part of the appellant that income was not earned until all of the work in respect of a transaction or an estate was fully completed. An appeal! court is always in aS good a position as a trial judge to draw inferences from the accepted evidence and the exhibits. It should also be pointed out thai the appellant was the person in the best position to explain the exhibits. The assessors and their assistants could only take the receipts and entries at their face value and in most cases would have to resort to reconstruction which may in many cases be based on surmise and speculation.

With these preliminary remarks I would now like to examine and comment upon the reasons given by the learned trial judge for coming to the conclusion arrived at, in respect to penalties, and to indicate why I must come to the opposite conclusion.

One of the first things pointed out by the learned trial judge to sustain his finding that the appellant wilfully evaded payment of tax on his income was that the appellant had agreed that he had acquired considerable expertise in the income tax field as evidenced by his success in a number of cases which he argued before the Tax Appeal Board and the Exchequer Court. The uncontradicted evidence, however, is that the appellant had not acquired any expertise in the income tax field until the early sixties long after the period in issue in these proceedings. The appellant did not become a lawyer until the age of 38 years and had been a farmer prior to that time. It is clear that when he opened his law practice he had no knowledge of accounting and kept only one receipt book for fees, disbursements and trust funds and had only one bank account for trust and current funds.

The receipt book, ledgers and other books of account were in such a confused and disorderly state that it took the assessors approximately four years to issue a reassessment. During the years 1952 and 1953 the appellant was able to enter the names of clients who had paid fees in his books and to record the names of persons to whom he had paid disbursements and issued cheques but in subsequent years many entries consisted of figures only. Is it any wonder that the appellant had difficulty in distinguishing between fees and trust funds, income, disbursements, etc? It is clear also that he was also under the mistaken view that he did not have to report income in the year he received it on a cash basis but only after the work he had been engaged to perform had been fully completed. Many examples of this can be found in the record and the exhibits. The appellant clearly kept his books in a slipshod manner. The fact that he did so does not in my opinion necessarily lead to the conclusion that he is guilty of wilful evasion. A failure to keep proper records is not necessarily accompanied by an intention to avoid payment of tax and by itself leads to no conclusion on the question of liability for penalty. The burden of establishing that the appellant is guilty of wilful evasion is upon the respondent.

The learned trial judge also laid emphasis on the fact that the appellant was most probably guilty of contravening the provisions of The Legal Profession Act of Saskatchewan. I hasten to point out that the appellant was not charged with that offence in these proceedings. He should, it is true, have kept separate trust and current receipt books and separate trust and current accounts in the bank for trust and current items and it was his duty to remit trust funds collected by him to his clients within a reasonable time after collecting the same, but these in my opinion are not facts which should properly be taken into consideration when considering whether or not his conduct amounted to wilful evasion or suppression.

It is rather significant that the learned trial judge then said in his judgment that it was against this background that he considered the Campbell, Pashovitz and the Victor Yuzak transactions, all of which he declared to be evidence of wilful evasion.

In respect to the Campbell trust funds, the fact that the appellant disregarded the instructions of his client to desist from further collections and failed to remit the sums collected by him to his client does not entitle the learned trial judge in my opinion to draw the conclusion that this was evidence of wilful suppression or evasion. As explained by the appellant, and there is no evidence to the contrary, he believed he was not under any obligation to deduct his fees and to report these fees in his income tax returns until the collection of the whole amount due and owing by the debtor was fully collected and completed.

The learned trial judge points out the evasiveness and lack of responsiveness of the appellant when being cross-examined but my examination of the cross-examination of the appellant indicates that he stood up well on cross-examination and was not broken down at any time despite a strong and searching cross-examination.

As for the Pashovitz transaction, it is only necessary to say that the explanation given by the appellant although somewhat unusual is nevertheless a reasonable and credible one, corroborated by the uncontradicted evidence of Pashovitz himself. There can be no doubt that the appellant sent the moneys marked “Fees” to the Department of Revenue on behalf of Pashovitz and although a receipt was issued for an additional $500 to the appellant this money was not paid by Pashovitz but was written out to indicate that the appellant was using his own fees which had remained in trust, which sum had been requested by the Revenue Department.

In so far as the Yuzak transaction is concerned, it is clear from my own reading of the evidence, which was re-read by counsel for the respondent to the Court that from the outset the $10 collected by the appellant for his client was trust money and that it was allocated to fees only when the client instructed him to do so some years later for other legal work. Mr Yuzak did not waver in the witness-box. He testified under oath that although he had signed a statutory declaration that the $10 was fees, I am satisfied that he meant that he considered it to be fees years later when additional work was done and only after it was brought to his attention that there was $10 in his account. It is clear from his evidence that he did not realize the purport of the statutory declaration first signed by him and that at that time he was referring to the fee for work done years later. The learned trial judge stated that he did not believe Mr Yuzak, but with respect it is my opinion there is nothing in the evidence which could lead him to this conclusion when the evidence is examined closely.

The learned trial judge also cited the careless and loose way in which the appellant treated and recorded his trust account moneys, which made it so difficult for the tax department to trace the various transactions. But again, was not the failure to use a proper accounting system the reason for the confused state of the accounts? Is it not fair, reasonable and just to infer from the state of the accounts as recorded and as explained, time and time again, by the appellant, that the omission to disclose all of his income was due to lack of knowledge of accounting practice, inadvertence, and the belief that he was not under an obligation to record fees as income in the year that he collected the same but only when the legal work in respect to a transaction or an estate had been fully completed, rather than to a deliberate and wilful intention to evade?

It is true that the appellant admitted in a few instances that he issued receipts, other than those which appeared in the receipt books, as for example the Roslinski receipt for $15. But this is an isolated incident and as I perceive it was not intended to indicate a common practice. The appellant was referring only to the odd or rare occurrence.

With reference to the figure of $600 in 1956 changed to $100, the appellant explained that the $500 was added to income later. The exhibits clearly indicate this. Again, the appellant admitted that he omitted some 24 items of income in 1955 because he had forgotten to post them. In my view this explanation is reasonable and credible when it was pointed out by the appellant that he had added the totals at the bottom of the ledger and did not notice that one of the totals was in the middle of the page.

The learned trial judge stated in his judgment that having regard to the above pattern established by the appellant’s course of conduct throughout the period under review, the evidence established that the said omission, that is, in respect to the 24 items, was deliberate and wilful. It is my view that the explanation given by the appellant, supported by the documentary evidence, indicates clearly that the omission to include these items was due to inadvertence.

The learned trial judge then referred to the appellant’s inability to swear positively that he issued receipts for all cash and cheques received. In my view the appellant was only being truthful for how could he swear positively, years after the event, that he had issued a receipt for all cash and cheques received. The learned trial judge gave as an example the Gelderbloom estate, but this item was explained and the explanation is credible and reasonable.

And finally, the learned trial judge stated at page 457 (page 18 of his judgment) that Lotochinski impressed him as being a fair, competent and reliable witness, but I must point out that in his explanation of the initials “S M” on a $500 item he stated that the appellant had made a change after the files had been seized, and on his examination for discovery he testified that the letters “S M” were on the ledger at the time the ledger had been seized.

in summary, the evidence and the exhibits lead me to the irresistible conclusion that the proper inference to be drawn from the same is that a failure to report legal fees was not due to wilful evasion or suppression but was due to the taxpayer’s ignorance of what was required of him, the poor bookkeeping system or the lack of one, the belief that fees were not to be reported until all of the work in respect to a transaction or an estate had been fully completed, the confused state of the books and the mixing of trust funds and fees. Furthermore, I am of the view that the evidence falls far short of establishing that the appellant is guilty of wilful evasion and that this conclusion cannot be justified on the evidence and the exhibits.

For these reasons I am of the opinion that the respondent is not entitled to assess penalties in respect to unreported legal fees for each of the years 1952 to 1959 inclusive and the appeal should to this extent be allowed.

Maguire, DJ:—I concur in the reasons for judgment of my Lord the Chief Justice and in respect to the directions therein given, save in respect to his dismissal of the appeal relative to penalties on the income tax payable imposed by the trial judge.

My approach to the difficult problem involved relative to these penalties is based on the proposition that a finding of fact by a trial judge should not be disturbed on appeal if there is evidence upon which the trial judge could reasonably find as he did. I point out further that, had I been the trial judge in this litigation, I might well have arrived at a conclusion on this issue different from that of the trial judge. However this, in itself, would not warrant substituting my opinion for that of the trial judge.

The appellant’s problems arise from his failure to set up and maintain any proper books of account. His entries in such books as he did maintain were haphazard at best and caused an undue expenditure of time by numerous employees of the Minister, spent in an endeavour to unravel the mysteries of his accounting and from this the income taxes properly payable by him.

The evidence is most voluminous and poorly organized, as also appellant’s argument before the Court. Certain things, however, became reasonably clear to me in considering and determining this issue. In delivering judgment at this time, I refrain from the rather heavy task of listing, in full detail, my reasons for arriving at a conclusion, on this issue, different from that of the learned trial judge.

My brother Greschuk has reviewed in some detail the reasons given by the learned trial judge, which, in part, indicated the basis for his conclusion on this issue. I agree with much that he has just said, with reservations on only one or two minor points.

I cannot agree with the trial judge’s opinion on the expertise of the appellant during most of the years under review. I consider the trial judge to be in error in his view of the Campbell transaction and the inference to be drawn therefrom. The Yuzak transaction is minor indeed and does not, in my opinion, go to establish wilfulness. Other items while establishing great slackness in recording receipts and disbursements, or reporting to clients, showing a gross carelessness or inability in an essential part of a lawyer’s practice, fall short of establishing wilfulness.

My review of the evidence and consideration of appellant’s prolonged and at times confusing argument convince me that, while he is rightly condemned for a marked departure from acceptable procedure in his practice of law, such does not establish wilful evasion as found by the learned trial judge.

The appeal is allowed in respect to the penalties imposed under the provisions of the Income Tax Act.