Date: 20110811
Dockets: A-261-09
A-262-09
Citation: 2011 FCA 234
CORAM: NADON
J.A.
EVANS
J.A.
LAYDEN-STEVENSON
J.A.
BETWEEN:
CLYDE HOUSE
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NADON J.A.
[1]
Before us
are appeals from two decisions of Associate Chief Justice Rossiter (the Associate
Chief Justice) of the Tax Court of Canada.
[2]
The first
of these decisions, wherein the Associate Chief Justice dismissed the
appellant’s appeals from the Minister of Revenue’s (the Minister) reassessments
of his 2003 and 2004 taxation years, was rendered on June 19, 2009. I will
refer to this decision as the Tax Decision. The only issue under appeal from
that decision concerns the appellant’s 2003 taxation year. More particularly,
the appeal pertains to the Associate Chief Justice’s determination that the
Minister was correct in including a sum of $305,000 in the appellant’s income
for 2003.
[3]
The second
decision under appeal (2009 TCC 245), also dated June 19, 2009, is one wherein
the Associate Chief Justice dismissed a motion brought by the appellant pursuant
to Rules 168 and 172 of the Tax Court of Canada Rules (General Procedures),
for an order setting aside or varying the Tax Decision.
[4]
Because I
conclude that the appeal from the Tax Decision should be allowed, we need not
decide the issues raised by the second appeal which I would dismiss, but
without costs.
[5]
I now turn
to a brief review of the salient facts.
The Facts
[6]
The
appellant, Mr. House, is 77 years of age. Around 1954, he left the island
portion of Newfoundland and Labrador for Goose Bay, in search of employment. Commencing in
1954, the appellant worked at many things, including piloting small airplanes.
In January 1980, he was involved in an airplane crash in which he was severely
injured and lost his right foot.
[7]
During the
course of his years in Goose Bay, the appellant operated a
hunting, fishing and air charter business under the name of Hunt River
Camps/Air Northland Ltd. (Hunt River), which he incorporated in
the province of Newfoundland and Labrador in 1978. Both
the appellant and his wife were shareholders in Hunt River.
[8]
Hunt River operated from
approximately 1978 to either 1998 or 1999, when its assets were sold. Following
the sale of the assets, the appellant and his wife returned to the island
portion of the province to retire.
[9]
In 2004,
Canada Customs and Revenue Agency (CCRA) requested that Hunt River file income tax returns for its 2001,
2002 and 2003 taxation years. The income tax returns were duly filed by Mr. Fred
Cole (Mr. Cole), a chartered accountant, retained by the appellant and Hunt River.
[10]
The income
tax return filed by Mr. Cole for the 2003 taxation year indicated that Hunt River had cashed in a $305,000 investment
during that year. This led CCRA to commence an audit of Hunt River and, in due course, CCRA also
commenced an audit of the appellant’s 2003 taxation year.
[11]
On
November 19, 2004, Ms. Elaine Ryan Brophy (Ms. Brophy), of the Verification and
Enforcement Division of the Newfoundland and Labrador Tax Services
Office, wrote to Hunt River advising it that its income
tax returns were under review and, for that purpose, certain books and records
of the company were necessary for a proper review. More particularly, Ms. Brophy
requested the following documents:
1.
Summaries,
journals or ledgers used to document the investments in the amount of $305,000,
and any transfer of these assets, including source documents;
2.
Invoices/receipts
in connection with any asset purchased/disposed;
3.
Business
bank account statements, deposit books and cancelled cheques;
4.
Copies of
accountant’s working papers with respect to the completion of the tax returns,
including ledgers, journals, adjusting entries, etc; and
5.
Personal
bank records of the shareholder(s), documenting the source of the funds for the
personal investments.
[12]
On
November 30, 2004, Mr. Cole responded to Ms. Brophy’s letter and indicated, inter
alia,
There were no transactions
during 2002. The amounts shown on the balance sheets are balance forwards from
2001. This company has not been operating since 1999. Because there were no
transactions to record, none of the records you request above exist. At the
time this company was winding down, in 1999, the company and its shareholders
were audited by your agency.
[Emphasis
in the original]
[13]
With his
letter, Mr. Cole provided to Ms. Brophy a schedule and copies of Term Deposit Certificates
in the name of the appellant’s wife with Labrador Savings and Credit Union (Labrador
Credit Union) for the period of November 18, 2000 to November 18, 2002. These
documents showed a balance of $652,000 in the appellant’s wife’s account.
[14]
On
November 18, 2005, Ms. Brophy wrote to the appellant informing him that unless
he submitted additional information or an acceptable explanation, CCRA intended
to include an additional amount of $305,000 in his income for the 2003 taxation
year.
[15]
On
December 1, 2005, Mr. Cole responded to Mr. Brophy’s letter of November 18,
2005, by providing her with information concerning the shareholders’ loan
account and with copies of balance sheets from Hunt River’s financial statements.
[16]
On July 7,
2006, Ms. Brophy wrote to the appellant informing him that CCRA was increasing
his income for the 2003 taxation year by $305,000.
[17]
The
appellant filed a Notice of Objection to the reassessment and, on December 21,
2006, CCRA’s Appeals Division informed the appellant that the Minister had
confirmed the reassessment. The Notification of Confirmation by the Minister
reads, in part, as follows:
The benefit Hunt River
Camps/Air Northland Ltd. conferred on you in 2003 amounted to $305,000. This
amount has been included in your income according to subsection 15(1).
[18]
In
February 2007, the appellant appealed the Minister’s Notification of
Confirmation by filing a Notice of Appeal with the Tax Court, arguing that the
$305,000 had not been withdrawn from Hunt
River in 2003. More particularly, the appellant said that a review of Hunt
River’s 2002 tax return led to the discovery of an accounting error, i.e. that
a $305,000 investment account carried on the books against an amount due to shareholders/directors
in the sum of $311,251 did not exist. As a result, a general journal entry was
recorded to correct the error and an accounting entry was made to debit the
investment account in the sum of $305,000 so as to reduce the balance to $0.
Further, an offsetting entry was made to charge the shareholders/directors’
account with a sum of $305,000 thereby reducing the current balance of $311,251
to a balance of $6,251. That sum represented the balance due to shareholders/directors.
[19]
The
Minister filed a Reply to the appellant’s Notice of Appeal and, at paragraph 11
thereof, set out, inter alia, the following assumptions:
b) At all
relevant times. [Mr. House] was the majority shareholder and an officer of [the
Company]…;
…
i) In the
2000, 2001 and 2002 taxation years, [the Company] held a long term investment
totalling $305,000;
j) In the
2003 taxation year, [the Company] transferred an investment of $305,000 to [Mr.
House];
[20]
The trial
was held at St.
John’s, Newfoundland on April 21 and 22, 2009, before
the Associate Chief Justice who, on April 22, 2009, delivered oral Reasons
dismissing the appellant’s appeal without costs.
[21]
On June
19, 2009, the Associate Chief Justice signed a Judgment dismissing the appellant’s
appeals from the reassessments of his 2003 and 2004 taxation years. As I have
already indicated, the only issue before us in the appeal from the Tax Decision
is whether the Associate Chief Justice made a reviewable error in concluding
that appellant had received $305,000 from Hunt River in 2003 as a shareholder’s benefit.
The Tax Court Decision
[22]
The Associate
Chief Justice, at the end of the hearing on April 22, 2009, delivered oral
Reasons dismissing the appellant’s appeals. After a brief review of the facts,
the Associate Chief Justice highlighted the assumptions put forward by the
Minister in his Reply to the appellant’s appeals of his reassessments. He
concluded that part of his Reasons by stating that the issue before him was
whether the appellant had received $305,000 in 2003 from Hunt River and, if so, whether that sum constituted
a repayment of a shareholder’s loan or whether it was a shareholder benefit.
[23]
The Associate
Chief Justice then stated that the burden of proof “clearly” fell upon the
appellant to demonstrate, on a balance of probabilities, that the Minister had
erred in regard to his assumptions, adding that the appellant had to “destroy”
the Minister’s assumptions. This led the Associate Chief Justice to observe that
the income tax system in Canada is a voluntary, self-reporting
and self-monitoring system premised on the fact that taxpayers have in their
possession the information required to make a proper report, adding that the
self-monitoring system is a privilege not to be abused by taxpayers. He then
referred to a number of cases which discussed what he characterized as the
“principle of self-monitoring”, including this Court’s decision in Njenga v.
R., 96 D.T.C. 6593, [1997] 2 C.T.C. 8 (FCA) (Njenga), and the Tax
Court of Canada decisions in Redrupp c. R., 2004 D.T.C. 3320 (Redrupp),
and Scragg v. R., 2008 D.T.C. 4511 (Scragg), for the proposition
that taxpayers should provide all relevant documents in support of their
claims.
[24]
The Associate
Chief Justice then made the following remarks found at page 114 of the
transcript of the evidence of April 22, 2009 (Transcript 2) (Appeal Book, Vol.
2, p. 391)
… This case before me comes
down to whether or not the Appellant has discharged the onus of proof in
relation to whether or not he received funds, when he received the funds, what
he did with them, the consideration for the $305,000, whether or not Hunt
River owed him any money and did the Appellant loan Hunt River any money, and
whether any money was received by whom and in what capacity shareholders’ loan
– payment of shareholders’ loan or otherwise, and was it all done in some year
other than 2003?
[Emphasis
added]
[25]
The Associate
Chief Justice answered the above questions by holding that the appellant had
not succeeded in “destroying” the Minister’s assumptions. He continued by
stating that the quality of the evidence before him was insufficient to support
the granting of the appellant’s appeal in regard to the Minister’s decision to
include $305,000 of income in his 2003 taxation year. At pages 116-117 of Transcript
2 (Appeal Book, Vol. 2, pp. 391-392), the Associate Chief Justice opined as
follows:
… The obligation of
record-keeping and production is on all taxpayers, not just a few, but all
taxpayers regardless of their station in life, rich, poor, educated,
uneducated, sophisticated, unsophisticated. Mr. Frederick Cole, should
have known better than anyone. He is a chartered accountant. He works in his
venue daily. He should have been aware as to what sort of documentation
would have been required. All we do know and know for sure is, No. 1, Hunt River in 2003 had a
305-thousand-dollar long-term investment. No. 2, Hunt River post 2000 [clearly a typographical
error, and should have read post 2003] did not have a 305-thousand-dollar long-term
investment. No. 3, Ms. House had investments in various amounts, none $305,000,
between November of 2000 and November of 2002 totalling $652,000. There was no
nexus or connection or documentation or otherwise for the $305,000. The
explanations provided were simply not sufficient to discharge the burden upon
the Appellant. The explanations provided were an assertion at best. I find
as a fact based upon the evidence before me that the Appellant did receive a
shareholders’ benefit of $305,000 in 2003, the amount received by the Appellant
in 2003 was not repayment of a shareholders’ loan, and that an accounting
error may well have been made, but that is not sufficient to find without
additional proof to discharge the assumptions that the money was received in
2003 by the Appellant.
[Emphasis
added]
[26]
The Associate
Chief Justice further opined that by producing additional documentation, the
appellant might have succeeded in discharging his onus of proof. As a result, he
dismissed the appellant’s appeal.
The Issue
[27]
The only
issue in this appeal is whether the Associate Chief Justice erred in finding
that the appellant had received a shareholder’s benefit of $305,000 in 2003.
Analysis
[28]
The matter
before us is an appeal from a decision of the Tax Court. Consequently,
questions of law are to be reviewed on a standard of correctness, whereas
findings of fact on the part of the Judge are to be reviewed on the standard of
palpable and overriding error (see: Housen v. Nikolaisen, 2002 SCC 33, [2002]
2 S.C.R. 235, paragraphs 8 and 10 (Housen)). Finally, questions of mixed
fact and law, i.e. questions involving the application of a legal standard to a
set of facts, are to be reviewed on a standard of palpable and overriding
error, unless the question of mixed fact and law contains an extricable
question of law (see: Housen, paragraphs 33 and 36).
[29]
For the
reasons that follow, I conclude that the Associate Chief Justice erred in dismissing
the appellant’s appeal with regard to the Minister’s reassessment of his 2003
taxation year and, more particularly, in finding that the appellant had failed
to meet his burden of “demolishing” the Minister’s assumptions that he had received
a sum of $305,000 during that taxation year.
[30]
In
determining the issue before us, it is important to keep in mind the Supreme
Court of Canada’s decision in Hickman Motors Ltd. v. Canada, [1997] 2
S.C.R. 336 (Hickman), where Madam Justice L’Heureux-Dubé enunciated, at
paragraphs 92 to 95 of her Reasons, the principles which govern the burden of
proof in taxation cases:
1.
The burden
of proof in taxation cases is that of the balance of probabilities.
2.
With
regard to the assumptions on which the Minister relies for his assessment, the
taxpayer has the initial onus to “demolish” the assumptions.
3.
The
taxpayer will have met his initial onus when he or she makes a prima facie
case.
4.
Once the
taxpayer has established a prima facie case, the burden then shifts to
the Minister, who must rebut the taxpayer’s prima facie case by proving,
on a balance of probabilities, his assumptions (in this case, that Hunt River
held at the end of taxation year 2002 a long-term investment of $305,000, which
it transferred to the appellant in 2003).
5.
If the
Minister fails to adduce satisfactory evidence, the taxpayer will succeed.
[31]
More
particularly, at paragraphs 92 and 93 of her Reasons in Hickman, Madam
Justice L’Heureux-Dubé explained in clear terms what onus had to be met by the
taxpayer at the initial stage:
92. It is trite law that
in taxation the standard of proof is the civil balance of probabilities: Dobieco
Ltd. v. Minister of National Revenue, [1966] S.C.R. 95, and that within
balance of probabilities, there can be varying degrees of proof required in
order to discharge the onus, depending on the subject matter: Continental
Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; Pallan v.
M.N.R., 90 D.T.C. 1102 (T.C.C.), at p. 1106. The Minister, in making
assessments, proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R.,
59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer
to “demolish” the Minister’s assumptions in the assessment (Johnston v.
Minister of National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R.,
73 D.T.C. 5359 (F.C.A.), at p. 5361). The initial burden is only to
“demolish” the exact assumptions made by the Minister but no more: First
Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93 This initial onus
of “demolishing” the Minister’s exact assumptions is met where the appellant
makes out at least a prima facie case: Kamin v. M.N.R., 93
D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679 (T.R.B.). In the
case at bar, the appellant adduced evidence which met not only a prima facie
standard, but also, in my view, even a higher one. In my view, the appellant
“demolished” the following assumptions as follows: (a) the assumption of “two
businesses”, by adducing clear evidence of only one business; (b) the
assumption of “no income”, by adducing clear evidence of income. The law is
settled that unchallenged and uncontradicted evidence “demolishes” the
Minister’s assumptions: see for example MacIsaac v. M.N.R., 74 D.T.C.
6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87 D.T.C. 652 (T.C.C.)…
[Emphasis
added]
[32]
In my
view, on the evidence before him, the Associate Chief Justice erred in law in
concluding that the appellant had not met his burden of “demolishing” the
assumptions made by the Minister at paragraphs 11(i) and (j) of his Reply to
the Appellant’s Notice of Appeal that Hunt River had, at the end of 2002, an
investment of $305,000 which it transferred to the appellant in 2003. The
Associate Chief Justice confused the appellant’s initial onus to “demolish” the
Minister’s assumptions by adducing evidence that, prima facie, supported
his position with the overall burden resting on the parties to prove that the
investment had or had not been paid to the appellant in 2003.
[33]
Underlying
the Associate Chief Justice’s conclusion is his view that the appellant had
failed to adduce evidence of sufficient quality to “support granting the appeal
in relation to the $305,000” (Transcript 2, p. 114 / Appeal Book, Vol. 2, p.
389). Specifically, the Associate Chief Justice criticized the appellant and
his accountant, Mr. Cole, for not producing relevant documents such as minute
books, general ledgers, cheques, invoices, bank statements, etc. As a result of
his view that source documents were required as a matter of law (I will address
this issue in detail later in these Reasons), the Associate Chief Justice failed
to give any consideration to Mr. Cole’s evidence. In other words, I am of the
view that the Associate Chief Justice erred in law in failing to consider
crucial evidence that was before him.
[34]
I now turn
to the evidence before us on this record and begin by making a preliminary
remark. At the time of the trial, both the appellant and his wife were advanced
in age and had difficulty recollecting, with precision, the events that took
place between 1999 and 2003. Consequently, the crucial evidence in this case was,
in my view, that of their accountant, Mr. Cole.
[35]
I begin
with the appellant’s evidence. The appellant agreed that at one point in time, Hunt River did hold a $305,000 investment.
Although he could not remember precisely in what year it had been held, he
testified that it had been transferred by Hunt River to his wife, not to him.
[36]
The
appellant went on to explain that his wife “kept the records” (Transcript of
April 21, 2009 (Transcript 1), p. 48 / Appeal Book, Vol. 2, p. 301), i.e. that
she kept the records and then sent them on to Mr. Cole. The appellant indicated
that he had nothing to do with “… these, this paperwork as such” (ibid.)
and he made it clear that Mr. Cole handled everything.
[37]
The
appellant explained that Hunt River sold three camps prior
to 2000, for the sum of $500,000 and that it further sold one airplane, also
prior to 2000, for the sum of $90,000. The proceeds from the sale of both the
camps and the airplane were placed in Hunt River’s account at the Royal Bank.
He also explained that he sold two houses prior to leaving Goose Bay for the
sum of $200,000, which was also placed “into the company” (Transcript 1, p. 76
/ Appeal Book, Vol. 2, p. 308).
[38]
When
questioned specifically about the investment of $305,000, he indicated that
that sum came out of Hunt River’s account and went into
his wife’s account at the Labrador Credit Union. The appellant explained why
the $305,000 was transferred to his wife’s account at the Labrador Credit
Union. His explanation is found at page 26 of Transcript 1, p. 26 (Appeal Book,
Vol. 2, , p. 296):
A. Well,
what happened was we were – my wife was with the Labrador Credit Union in Goose Bay. That was a new Credit Union. It – I
think it’s Eagle River Credit Union now, but at that time it was the Labrador
Credit Union. And a company couldn’t become a member of that bank. So my wife
was a member of that bank, and we were in the process of moving. And so anyway,
they offered her seven and a half percent on her money, and so we took the
money out of the Royal Bank which was under Hunt River, because we were
finished with that, and we put it in her name in the Credit Union, and we got
seven and a half percent on our investment in the bank.
[39]
I now turn
to the evidence of Mrs. Theresa House, the appellant’s wife.
[40]
Mrs. House
testified that she was a shareholder in Hunt River, with one share. She indicated
that the $305,000 was taken out of Hunt
River and given to her (Transcript
1, p. 207 / Appeal Book, Vol. 2, p. 341). She explained that the money was put
in her account at the Labrador Credit Union because “… we were told that we
would get fairly good interest” (Transcript 1, p. 210 / Appeal Book, p. 342).
She could not, however, specifically remember cashing out the $305,000. In her
opinion, it had been cashed out around 2000, when it was placed in her account
at the Labrador Credit Union. She indicated that “I was given the money by my
husband, but I don’t remember taking it out of the bank” (Transcript 1, p. 224
/ Appeal Book, p. 345). She made it clear that neither she nor her husband had
good memories, saying that hers was worse than his. At the time of the trial,
Mrs. House was almost 76 years of age.
[41]
I now turn
to Mr. Cole who has been a chartered accountant since 1980 and Hunt River’s accountant since 1982.
[42]
He was
asked questions regarding the filing of Hunt River’s tax return for the year 2003 and
indicated that he had filed that tax return. He added that there was a request
by CCRA for the filing of Hunt River’s tax returns for the
years 2001, 2002 and 2003. He began by saying that he initially filed returns
for 2001 and 2002 only. Then, with respect to the 2003 tax return, he made the
following remarks (Transcript 1, p. 92 / Appeal Book, Vol. 2,l p. 312):
Q. - would you tell us
what you did?
A. Well,
I – well, the company had basically been in operative [sic] since it
sold property called Boarder Beacon, and that sale occurred in 1999. And
essentially there were – there wasn’t a lot left of the company. It was more or
less a shell. So the first thing to do is pull out, you know, the last tax
return that was filed and have a look at it. And on that tax return it showed
that there was an amount invested at the Royal Bank, and that investment no
longer was there.
[43]
He was
then referred to balance sheet information prepared by Ms. Brophy which showed
that Hunt River held a long-term investment of $305,000
at the end of December 2002. He stated that he went looking for that investment
so as to determine whether it existed or not. His search led him to the
conclusion that the investment did not exist. Hence, he charged the $305,000 to
the shareholders’ account, i.e. he reduced the amount owing from $311,000 to
$6,000 (Transcript 1, pp. 93-95 / Appeal Book, Vol. 2, p. 313).
[44]
This
finding led him to inform CCRA that there had been no transactions during 2002
for Hunt River, that “… the amounts that were filed for 2002 were amounts
carried forward from 2001” (Transcript 1, p. 97 / Appeal Book, Vol. 2, p. 314)
and that “… the company had not been operating since 1999” (ibid.).
[45]
In answer
to questions posed by the Associate Chief Justice, Mr. Cole indicated that the
$305,000 had initially been placed in an account at the Royal Bank in Hunt
River’s name, adding that for the 2003 taxation year, he had “… discovered that
investment no longer existed in the company’s name” (Transcript 1, p. 110 /
Appeal Book, Vol. 2, p. 317) and that he had “… reduced the shareholders’
account corresponding it” (ibid.). He then went on to explain that in the
course of his search, he had examined Hunt River’s records from 1998-1999 to
December 31, 2003, finding that the $305,000 investment no longer existed,
which is why he reduced the shareholders’ account by $305,000. When asked why he
had reduced the shareholders’ account by $305,000, he answered as follows
(Transcript 1, p. 111 / Appeal Book, Vol. 2, p. 317):
A. Well
the – when I tried to find the investment certificate, I couldn’t find it at
the Royal Bank, and apparently Mrs. House had it in her name at the Credit
Union, so I did – I charged it to her.
[46]
In
cross-examination, he was asked specific questions concerning the $305,000
investment, in regard to which CCRA took the position that it had been
transferred to the appellant in 2003. First, he disagreed with the statement
made by counsel for the respondent that “[i]n the 2000, 2001 and 2002 taxation
years, Hunt held a long-term investment totalling $305,000” (Transcript 1, p.
117 / Appeal Book, Vol. 2, p. 319). He indicated that the investment had been
cashed out in the year 2000 and reiterated his view that the $305,000
investment had been taken out by Mrs. House, adding that he had discovered this
information when filing, in 2006, Hunt River’s
2003 tax return.
[47]
When again
questioned by the Associate Chief Justice, Mr. Cole explained that he was
satisfied that the $305,000 had been paid to the appellant’s wife and that she
had bought “additional GICs at the Labrador Credit Union” (Transcript 1, p. 154
/ Appeal Book, Vol. 2, p. 328).
[48]
The only
witness called by the respondent was Ms. Brophy, who explained the basis of the
Minister’s reassessment of the appellant’s 2003 taxation year. At page 164 of Transcript
1 (Appeal Book, Vol. 2, p. 330), she was asked why she assessed a benefit of
$305,000 to the appellant. Her answer was as follows:
A. As I
conducted the review and spoke to Mr. House and his presentative [sic],
Mr. Cole, in conversations I was advised by Mr. Cole that the asset was held by
either one of the corporations or one of the individuals. He was unsure at that
time. So I requested information to substantiate where exactly the investment
was, who the shareholders were, and any general ledgers, bank deposits. There’s
actually an exhibit in the Book of Exhibits which is an initial contact letter
where I asked for information pertaining to that transaction.
[49]
Ms. Brophy
added the following at pages 165-166 of Transcript 1 (Appeal Book, Vol. 2, p.
331:
A. I
spoke with him [Mr. Cole] on a couple of occasions. I initially spoke with him,
I think it was October ’04, and the file had been postponed for a little bit of
time actually because Mr. House was undergoing some medical procedures. So I
spoke to Mr. House then and I spoke to him again – or I’m sorry, I spoke to Mr.
Cole then, and I spoke to him as well around, I think it was April 13th
or 14th of ’05, and we spoke about the $305,000 investment again.
And basically Mr. Cole made the same statement that the investment does exist,
but at that time he didn’t know who held the investment, whether it was ECJ Eagle
Incorporated, Hunt River Camps, or if it was one of the individuals.
Q. Okay.
A. And
actually after that, shortly after that, probably in May I discovered that an
additional financial statement, the balance sheet, had been filed, the initial
assessment for the 2003 taxation year which indicated that $305,000 was no
longer on the balance sheet of Hunt River Camps.
[50]
Ms. Brophy
further explained that she had not received “source documents” from Mr. Cole or
the appellant. Later on in her testimony, in response to a question posed by
the Associate Chief Justice, she said that she had not been made aware by the
appellant or by Mr. Cole, in the course of her audit, that the $305,000 had
been paid out in 2000. The following questions and answers appear at Transcript
1, pp. 187-188 (Appeal Book, Vol. 2, p. 336):
Q. Oh, yes. Okay. Okay,
well Mr. Cole in your absence explained that.
A. Oh, OK.
Q. Explained
that the $305,000 shouldn’t be there December 31st, 2003. It should
have gone out on December 31st, 2000, because December 31st
– by December 31st, 2000, the $305,000 had already left Hunt, Hunt River.
A. Well,
we weren’t provided with any information on that end –
Q. No,
no. I realize that, but that’s – that was the explanation he gave.
A. Okay.
[51]
On that
point, she was questioned by counsel for the respondent and again answered that
she had not been made aware, during the course of her audit, that the $305,000
had come out of Hunt River’s account in 2000 (Transcript 1, pp. 188 to 190 /
Appeal Book, Vol. 2, pp. 336-337), adding that she was also not aware, at the
time of the audit, that the entry for December 31, 2003, showing an investment
of $305,000, was an error (Transcript 1, pp. 193-194 / Appeal Book, Vol. 2, p.
338).
[52]
That, in
essence, is the evidence that was before the Associate Chief Justice when he
rendered the Tax Decision.
[53]
The
Associate Chief Justice dealt with that evidence as follows. As I indicated
earlier, he concluded that the appellant had not discharged his onus of
“demolishing” the Minister’s assumptions. He came to this conclusion because,
in his view, the evidence was of insufficient quality. The Associate Chief
Justice so held because, in effect, the appellant and Mr. Cole had failed to
adduce documents such as cancelled cheques, deposit statements, registered
retirement savings plan documents, etc. More particularly, with regard to Mr.
Cole’s evidence, he stated that Mr. Cole, a chartered accountant, “… should
have been aware as to what sort of documentation would have been required”
(Transcript 2, p. 116 / Appeal Book, Vol. 2, p. 391), adding that “… an
accounting error may well have been made, but that is not sufficient to find
without additional proof [i.e. source documents] to discharge the assumptions
that the money was received in 2003 by the Appellant” (Transcript 2, p. 117 /
Appeal Book, Vol. 2, p. 392). In other words, the Associate Chief Justice was
of the view that Mr. Cole’s testimony was not sufficient on its own, without
corroboration by the production of source documents to “demolish” the
Minister’s assumptions.
[54]
For this
view, the Associate Chief Justice relied, inter alia, on the statement made
by Bowie J. in Scragg, that “assertion without proof is simply not
sufficient” and on this Court’s decision in Njenga, where the Court held
that all taxpayers had an obligation to keep proper records and to produce
them.
[55]
Before
stating why I conclude that the Associate Chief Justice erred, I should note
that he made no credibility findings against Mr. Cole nor, for that matter, did
he make credibility findings against the appellant or his wife. To this, I
would add, as I indicated earlier, that the evidence of both the appellant and
his wife was somewhat confusing because of the difficulty they both obviously
had in recollecting events which had taken place almost 10 years before. As to
Mr. Cole’s evidence, he testified under oath that he had made an error in preparing
Hunt River’s tax return for 2003
and that he had taken steps to correct that error, explaining why a correction
was necessary in the circumstances. Mr. Cole also made it clear that he had no
doubt whatsoever that the $305,000 investment was no longer in Hunt River’s
account at the end of 2002 and that it had been paid out around 2000 when the
decision was made to transfer the funds from Hunt River’s account at the Royal Bank
to Mrs. House’s account with the Labrador Credit Union. One further point – Mr.
Cole’s testimony was neither contradicted nor impeached in any way whatsoever
by the respondent.
[56]
In
considering the question of whether or not a taxpayer must adduce the type of
documents which the Associate Chief Justice felt were required, it is important
to keep in mind the remarks of Madam Justice L’Heureux-Dubé in Hickman,
where she states, at paragraph 87, that “[f]urthermore, where the ITA [The
Income Tax Act] does not require supporting documentation, credible oral
evidence from a taxpayer is sufficient notwithstanding the absence of records”,
which led her to state at paragraph 88 that “… the ITA does not require
that the revenue be shown in the financial statements and, accordingly, since
no issue of credibility was raised, the evidence adduced by the appellant is
clearly sufficient”.
[57]
In my
view, the Associate Chief Justice made two errors of law. First, he confused
the appellant’s initial onus to “demolish” the Minister’s assumptions with the
overall burden resting on the parties to prove their respective cases. Second,
he erred in failing to consider Mr. Cole’s evidence. Had he considered Mr.
Cole’s evidence, as he was bound to, he would necessarily have concluded, in my
view, that the appellant had made a prima facie case “demolishing” the
Minister’s assumptions. In Amiante Spec Inc. v. Canada, 2009 FCA 239, 2009 FCJ No.
603 (QL), our Court, at paragraph 23, explained a prima facie case in
the following terms:
[23] A prima facie case
is one "supported by evidence which 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. It may be contrasted with conclusive
evidence which excludes the possibility of the truth of any other conclusion
than the one established by that evidence" (Stewart v. Canada,
[2000] T.C.J. No. 53, paragraph 23).
[58]
I now turn
to the Associate Chief Justice’s first error. Although he appears to have been
aware that the initial burden on the appellant was that of “demolishing” the
Minister’s assumptions, he did not, in my view, apply that burden but rather
applied that of the overall burden resting on the parties.
[59]
After
referring, at the outset of his Reasons, to the appellant’s burden of
demonstrating that the Minister had erred in regard to one or more of his
assumptions, adding that the appellant “must destroy the assumption or
assumptions by his evidence in presentation of his case”, he went on to state
that the case before him “… comes down to whether or not the appellant has
discharged the onus of proof in relation to whether or not he received funds,
when he received the funds, what he did with them, the consideration for the
$305,000, etc.” (Transcript 2, p. 114 / Appeal Book, Vol. 2, p. 391). He then
concluded, after reviewing the evidence and the case law, that the appellant
had not “discharged his onus to destroy the assumptions relied upon by the
respondent”. His conclusion was based on his view that the evidence adduced by
the appellant was of poor quality. Finally, he stated that he found as a fact that
the appellant had received $305,000 in 2003. In considering the view taken by
the Associate Chief Justice with regard to the applicable burden, it is
important to remember that, other than the reliance on his assumptions, the
Minister adduced no evidence whatsoever to demonstrate that the appellant had
received $305,000 in 2003.
[60]
With
respect, I am unable to conclude that the Associate Chief Justice applied the
correct burden of proof in regard to the Minister’s assumptions. Rather, I
believe that the Associate Chief Justice was looking, not for evidence on the
part of the appellant “demolishing” the Minister’s assumptions, but for positive
evidence that the appellant had not received $305,000 in 2003. As Madam Justice
L’Heureux-Dubé stated in Hickman, at paragraph 92, the taxpayer’s burden
is that of “… “demolishing” the Minister’s assumptions but no more”.
[61]
As stated
earlier, the appellant’s burden was that of mounting a prima facie case
“demolishing” the Minister’s assumptions. In other words, the appellant’s
burden was to demonstrate that the Minister’s assumptions were incorrect, not
to establish that he had not received $305,000 in 2003. On my understanding of
the Associate Chief Justice’s Reasons, he believed that the appellant had to
demonstrate, on a balance of probabilities, that he had not received $305,000
in 2003. In my view, this explains why he was not satisfied with Mr. Cole’s oral
testimony and required that source documents be produced to establish that the
appellant had not received $305,000 in 2003. In particular, it explains why he
totally disregarded Mr. Cole’s testimony to the effect that his errors had led
the Minister to assume that $305,000 had been transferred to the appellant in
2003.
[62]
Had the
Associate Chief Justice properly understood and applied the correct burden, he
would not have been looking for positive evidence establishing that the
appellant had not received $305,000 in 2003 but, rather, for evidence establishing
that the Minister’s assumptions were incorrect. By adducing evidence which
explained why the Minister’s assumptions could not be right – because the
returns on which the Minister had relied in making his assumptions were in
error and that these errors had been corrected – the appellant had offered
evidence which, unless disbelieved or rebutted, was capable of establishing a prima
facie case “demolishing” the Minister’s assumptions.
[63]
It is
therefore my opinion that the Associate Chief Justice erred in law in misapprehending
the nature of and in not applying the correct burden of proof.
[64]
I now turn
to the Associate Chief Justice’s second error. In my view, he erred in law in
failing to consider Mr. Cole’s testimony. This error was caused by the mistaken
view that Mr. Cole’s testimony, without the support of source documents, could
not help the appellant in making out his case.
[65]
The
Associate Chief Justice deals with Mr. Cole’s testimony at page 116 of
Transcript 2 (Appeal Book, Vol. 2, p. 391) in very brief terms. That part of
his Reasons, which I have already reproduced at paragraph 25 of these Reasons,
simply states that Mr. Cole, as a chartered accountant, “… should have known
better than anyone” that source documents should have been produced, adding
that “… an accounting error may very well have been made, but that is not
sufficient to find without additional proof to discharge the assumption that
the money was received in 2003 by the Appellant”.
[66]
This is
the extent of the Associate Chief Justice’s analysis of Mr. Cole’s testimony.
It is clear, in my view, that he gave no consideration to this evidence because
of his view that source documents ought to have been produced. This view, in my
respectful opinion, is an error. As I indicated at paragraph 57 of these
Reasons, Madam Justice L’Heureux-Dubé, at paragraph 87 of her Reasons in Hickman,
made it clear that credible oral evidence does not need the support of source
documents to establish a point.
[67]
The Income
Tax Act (the ITA) did not require the appellant to produce source
documents and the Associate Chief Justice made no credibility findings against
Mr. Cole. By reason of his mistaken view that source documents were necessarily
required, the Associate Chief Justice did not consider Mr. Cole’s evidence. After
stating that the evidence of both the appellant and his wife was unclear, the
Associate Chief Justice dealt with Mr. Cole. Rather than attempting to
determine whether or not Mr. Cole’s evidence was credible and, more
particularly, whether his evidence was sufficient to explain why the entries
made in the 2001, 2002 and 2003 tax returns were in error and whether, as a
result of his testimony, the Minister’s assumptions had been “demolished”, the Associate
Chief Justice simply stated that Mr. Cole should have known that source
documents had to be produced. There is no assessment of Mr. Cole’s oral
evidence. The Associate Chief Justice disregarded it because source documents
had not been produced. In my respectful view, he erred in law in not
considering Mr. Cole’s evidence.
[68]
Although
Mr. Cole’s evidence, coupled with that of the appellant and his wife, is far
from perfect, it is, in my view, sufficient to demonstrate, on a prima facie
basis, that there was no long-term investment held by Hunt River at the end of
2002 and that, consequently, no transfer of that investment to the appellant
had taken place in 2003. As I have already indicated, the Associate Chief
Justice made no findings of credibility against Mr. Cole and his evidence was
neither challenged nor impeached by the respondent. Absent evidence challenging
Mr. Cole’s explanation for the erroneous entries in the 2001, 2002 and 2003 tax
returns and his explanation that no funds were left at the end of 2002, there
was no basis upon which the Associate Chief Justice could refuse to accept Mr.
Cole’s evidence.
[69]
Confronted
with Mr. Cole’s evidence, the respondent was bound, in my view, to adduce
evidence rebutting the appellant’s prima facie case by proving, on a
balance of probabilities, that his assumptions were correct, i.e. by
demonstrating that $305,000 had been transferred to the appellant’s account in
2003. As the Minister failed to adduce any evidence challenging Mr. Cole’s
testimony, the appellant’s prima facie case was not rebutted.
Consequently, in these circumstances, the Associate Chief Justice ought to have
concluded in favour of the appellant.
[70]
In
summary, I am satisfied Mr. Cole’s evidence was capable of “demolishing” the
Minister’s assumptions and that had the Associate Chief Justice considered Mr.
Cole’s evidence, he would have concluded that a prima facie case had
been made by the appellant “demolishing” the Minister’s assumptions.
[71]
I
indicated earlier that I would address the Associate Chief Justice’s view that
source documents were required for the appellant to succeed on his appeal. As I
have already stated, the Associate Chief Justice relied on this Court’s
decision in Njenga and on the Tax Court decisions in Scragg and Redrupp,
which he summarized as follows (Transcript 2, p. 113 / Appeal Book, Vol. 2, p.
391):
… These authorities clearly
show the obligation of the taxpayer to produce documentation to support their
claims. They basically stand for the following propositions: No. 1,
“Self-written receipts or assertions without proof.” That’s the Federal the
Federal Court of Appeal in Njenga. No. 2, “Year-end balances on balance
sheets are not sufficient to prove who advanced funds to the corporation nor
the source of those funds.” That’s the Scragg case. “Taxpayers are
responsible themselves with the dilemma that they may face if they don’t have
proper records.” That’s the Njenga case, the Trial Division. And
finally, “The best evidence is what is required, not schedules or summaries,
but original source documents,” and that is the Redrupp case.
[72]
The
Associate Chief Justice appears to have elevated the judicial requirement that supporting
documents may be required for a taxpayer to establish his or her claims and
deductions to an authoritative principle that documents will always be required
for a taxpayer to establish his or her case. There is, in my respectful view,
no principle to the effect that oral evidence must necessarily be supported by
source documents. Whether documents are required to establish a point will
depend on the particular circumstances of the case. However, whether documents
are required or not, a judge must nonetheless assess the oral evidence and
determine whether it is credible. The requirement for documents, or not, will
often turn on such an assessment.
[73]
I have
carefully considered this Court’s decision in Njenga and the Tax Court’s
decisions in Scragg and Redrupp and find nothing in those
decisions to support the Associate Chief Justice’s view that oral evidence, on
its own, cannot suffice to establish what it is intended to establish.
[74]
I first
turn to Njenga. In that case, the taxpayer was claiming that she could
deduct, inter alia, child care expenses from her income, pursuant to
section 63 of the ITA. In concluding that the taxpayer ought to have
produced documents in support of her expenses, the Tax Court Judge, in Njenga
v. Canada, [1995] T.C.J. No. 927 (QL),
made it clear that he could not rely on her oral evidence that these expenses
had been incurred and, at paragraph 19, opined as follows:
19 However, the major focus arising from the trial, is the
total conduct of the Appellant during the years relevant. To accept that the
Appellant during those years in question left her children - some as young as
three years old - in the care of a person about whom she knew so very little
and monitored so nonchalantly requires more confidence in her statements
than I am able to muster - no address, no social insurance number, no other
domestic details, no set schedule, no hours of work
record, no report filed by Kabogo before
payment, no cheque, no regular receipts, etc. And her statements to that effect
is all that I have.
[Emphasis
added]
[75]
In other
words, the Tax Court Judge did not find the taxpayer credible and, thus, could
not entertain her claim for expenses unless she provided documents to support
her statement that she had incurred them. It is in that context that the
remarks of McDonald J.A., for this Court in Njenga, at paragraphs 3 and
4 of his Reasons, must be understood:
3. The Income tax
system is based on self monitoring. As a public policy matter the burden of
proof of deductions and claims properly rests with the taxpayer. The Tax Court
Judge held that persons such as the Appellant must maintain and have available
detailed information and documentation in support of the claim they make. We
agree with that finding. Ms. Njenga as the Taxpayer is responsible for
documenting her own personal affairs in a reasonable manner. Self written
receipts and assertion without proof are not sufficient.
4. The problem of
insufficient documentation is further compounded by the fact that the Trial
Judge, who is the assessor of credibility, found the applicant to be lacking in
this regard.
[Emphasis
added]
[76]
In Scragg,
the Minister had disallowed the taxpayer’s claim for the deduction from his
income of interest paid on borrowed money by him during taxation years 1999 to
2001. The taxpayer argued that he had used the borrowed funds to provide
working capital for a number of his corporations, which produced income for him
in the form of both profit and management consulting fees, and thus was deductible
under paragraph 20(1)(c)(i) of the ITA. The Tax Court Judge
concluded that the taxpayer had not discharged his burden of demonstrating that
the borrowed funds had been put to an eligible use. In so concluding, the Tax
Court Judge noted that the taxpayer had been unable to produce the books and
records of the companies to which he had allegedly lent the borrowed money. At
paragraph 7 of his Reasons, the Tax Court Judge made the following remarks:
7. Mr. Scragg's testimony was both
confused and confusing. He referred repeatedly to SDC and 286603, as well as
three other companies that were at one time involved in the entertainment
industry, as being his companies, without ever making clear how the shares were
actually held, or whether he held shares carrying a right to receive dividend
income. He identified the August 7, 1996 deposit as part of the loan proceeds,
but was unable to say exactly what he had done with the remaining $76,596.59,
other than to aver that some $32,970 of it was applied to pay his obligation as
guarantor of a bank loan for one of his screen production companies. Here, as
elsewhere, he was vague as to the exact amount of the obligation that he paid.
[77]
It is in
that context that the Tax Court Judge found support in our decision in Njenga,
referring in particular to paragraph 3 of McDonald J.A.’s Reasons. The Tax
Court Judge concluded his Reasons with the following remarks:
10. I do not wish to leave
the impression that Mr. Scragg was not an honest witness. I have no doubt that
he believed quite sincerely that he had put these loan proceeds to an eligible
use in one or more of his corporations. It was clear throughout his evidence,
however, that he did not have any clear recollection of the specific
application of the funds in question, either initially or throughout the period
of almost four years between the initial borrowing and the repayment. The quality
of the evidence before me as to the use of the borrowed funds is simply not
sufficient to support a claim to deduct the interest that was paid.
[78]
In Redrupp,
the taxpayer had deducted significant amounts as business expenses, carrying
charges and farm losses. The taxpayer also claimed a provision against income
and a deduction regarding a wrongful debt. The Tax Court Judge began his
analysis by stating at paragraph 14:
14. … The Appellant faces questions of
credibility, reasonableness and common sense. The amounts in dispute are high
and not proven. The best evidence would be an invoice from the creditor, a
cancelled cheque, a receipt or other proof of payment. The best evidence was
not presented in Court.
[79]
After
referring to McDonald J.A.’s remarks found at paragraph 3 of his Reasons in Njenga,
the Tax Court Judge stated at paragraph 16:
16. I will not permit the deduction of
the amounts in dispute based on the Appellant's schedules and oral testimony
alone. Certain amounts, in particular, cry out for verification.
[80]
What these
cases stand for is the proposition that, depending on the circumstances of the
case, a taxpayer may be required, in addition to his oral testimony, to adduce
supporting documents to prove a given point. In both Njenga and Scragg,
the Court was not satisfied with the taxpayers’ credibility. In Redrupp,
the Tax Court Judge was of the view that the nature of the claims being made by
the taxpayer required supporting documents.
[81]
In the
present matter, there are no findings of credibility made in regard to Mr.
Cole’s evidence. It is also of importance to note that contrary to Njenga,
Scragg and Redrupp, the appellant herein is not seeking to deduct
disbursements or expenses but, rather, is attempting to show that the
Minister’s assumptions that he received $305,000 in 2003 were incorrect. More
particularly, Mr. Cole’s evidence sought to explain why, at the end of 2002,
there was no investment of $305,000 left in Hunt River’s account and, hence, that that amount
had not been disbursed in 2003 to either the appellant or his wife. Further, in
Njenga, Scragg and Redrupp, the Tax Court judges scrutinized
the oral evidence presented by the taxpayers and made clear determinations with
regard to the quality of that evidence. In the present matter, the Associate
Chief Justice did not perform that task.
[82]
I
therefore conclude that the authorities relied upon by the Associate Chief
Justice do not support his view that Mr. Cole’s oral evidence could be
disregarded simply because he had not produced supporting documents.
[83]
For all of
these reasons, the Associate Chief Justice’s factual determination that the
appellant did receive a shareholder’s benefit of $305,000 in 2003 constitutes a
palpable and overriding error.
[84]
In view of
my conclusion that the appellant made out a prima facie case
“demolishing” the Minister’s assumptions that Hunt River held an investment of
$305,000 at the end of 2002, which it transferred to the appellant in 2003, and
that the Minister has not rebutted the appellant’s case, I need not address the
question of whether the $305,000 was, in law, paid out to the appellant or to
his wife.
Disposition
[85]
For these
reasons, I would allow the appeal of the Tax Decision with costs, I would set
aside the Judgment of the Associate Chief Justice and, rendering the Judgment
which ought to have been rendered, I would allow the appellant’s appeal from
the Minister’s reassessment of his 2003 taxation year and return the matter to
the Minister for reassessment in accordance with these Reasons.
“M.
Nadon”
“I
agree.
John
M. Evans”
“I
agree.
Carolyn
Layden-Stevenson J.A.”
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