Patricio v. The Queen, 84 DTC 6413, [1984] CTC 360 (FCTD)

Reed, J:—This case puts in issue the validity of certain net worth assessments made by the defendant, of the plaintiff taxpayer’s income for the years 1973 to 1977.

The defendant commenced a normal audit of the plaintiffs books in January 1979, but discovered that there were insufficient records for this to be practical. The evidence of the departmental official in question, a Mr Brunsveld, was:

. . . I tried to do an audit in the normal way, trying to verify income and expenses, and as far as the expenses went I had no problems there, but there seemed to be some discrepancy in income. Deposits were higher than the income that was reported. And I also prepared what’s called a Source and Application of Funds, which indicated that the income that he reported was not sufficient to support his lifestyle. . .. I concluded that I couldn’t verify income and expenses in the normal way, and therefore I had to prepare a Net Worth Statement.

The net worth statements thus prepared resulted in the Minister reassessing the plaintiff for tax on a net worth basis. By notice dated January 29, 1981, the plaintiff was reassessed on the basis that his income for the 1974 taxation year was $3,622.18 higher than reported; for the 1975 taxation year $4,511.32 higher; for the 1976 taxation year $12,140.65 higher; and for the 1977 taxation year $2,095.01 higher. The Minister further levied penalties under the authority of subsection 163(2) of the Income Tax Act in the amount of $226.53 for 1974; $308.92 for 1975; $787.19 for 1976 and $52.58 for 1977.

Subsection 163(2) provides for the levying of penalties against:

Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or Omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation . . .

The validity of the reassessments is challenged on the ground that (1) the Minister’s base assessment of the taxpayer’s assets as of January 31, 1973 was too low because certain outstanding loans owed to the taxpayer were not included; (2) an interest income deduction of $800 (or alternatively a classification of this sum as repayment of principal) in 1976 and 1977 had not been allowed;

(3) deductions for payments made to non-resident dependents in 1976 had not been allowed (or alternatively the amounts to which they relate should have been deducted from the plaintiffs net worth statement).

The First Issue — Loans receivable as of December 31, 1973

The plaintiffs evidence was that prior to December 31, 1973 he had loaned $1,500 to a Mr Martins; $2,500 to a Mr Medina; $3,000 to a Mr Santos; $2,000 to a Mr Perfeito; $3,000 to a Mr Ferraz and $1,000 to a Mr Bernhard, so that a total of $13,000 was owing to him as of December 31, 1973. These loans were allegedly all made in cash, except for $1,000 of the $3,000 loaned to Mr Ferraz; it was paid by cheque. The taxpayer kept no record of the loans except in his head. The loans, except for $1,000 of the $3,000 allegedly loaned to Mr Ferraz were paid back on a bit by bit basis ($200 or $300 at a time) during the subsequent taxation years, of which the taxpayer kept no record — except in his head.

As of the date of trial, according to the taxpayer, Mr Martins had returned to live in Portugal; Mr Medina had gone to live in California; Mr Santos (who spoke little or no English) lived in Kitchener; Mr Perfeito was perhaps somewhere near Calgary; Mr Ferraz lived in Kitchener and Mr Bernhard had died of a heart attack three years previously.

The only loan receivable which the Minister took into account in determining the taxpayer’s assets as of December 31, 1973 was $1,000 of the $3,000 allegedly loaned to Mr Ferraz. This was accepted because a cancelled cheque, dated December 12, 1973, existed as evidence of the fact that the taxpayer had paid $1,000 to Mr Ferraz on that date. There is nothing to indicate, however, that the payment was by way of loan. Mr Brunsveld took the taxpayer’s word that such was the purpose of payment.

The issue is basically one of the credibility of the testimony given by the plaintiff taxpayer.

Much was made, by counsel for the plaintiff, of the fact that his client’s knowledge of English was limited and during the taxation years in question was even more limited, and that he had not received a great deal of formal education. He received four years of formal education and subsequent to that attended trade school. There is no doubt that I would have expected any records the taxpayer might have kept to be in Portuguese, not English.

Despite his limited formal education, I did not get the impression that Mr Particio was in any way disadvantaged because of this. He struck me as being a very intelligent and capable individual. He came to this country in March 1970, as a landed immigrant, and within two years had started his own drywall and plastering subcontracting business. He purchases his first residence in January 1971 and sold that in April 1972, purchasing a second in May of that year. In 1975 he purchases a third property, allegedly together with two other people, as a business venture. (The property was renovated and subsequently resold at a profit.) He took his family (wife and four children) home to Portugal in 1977 for a holiday. His lifestyle and success indicate an alertness of mind which was also demonstrated by his demeanour in the witness stand.

Unfortunately, however, the plaintiff appeared to me to be a person who will make statements, and give answers, to produce the most convenient result for himself at the time, rather than attempting to be as accurate and truthful as possible. This characteristic renders most of his evidence of dubious value.

I will illustrate my overall judgment in this regard by reference to one area of the evidence. At the trial the plaintiff indicated that $8,500 of the money in his bank account in 1977 was owed by him to a Mr Carlos Ferreira. His evidence was that Mr Ferreira had sold an apartment building, but before completion of the sale had returned to Portugal, leaving instructions that the proceeds ($24,000) be paid to the taxpayer. Mr Ferreira owed the plaintiff $15,000, which the taxpayer treated as his own, but the remaining $8,500 was considered by him to be an amount held in trust for Mr Ferreira. On the examination for discovery, however, the taxpayer had not suggested the amounts owed to Mr Ferreira were the proceeds of the sale of an apartment building. On the examination for discovery, he had taken the position that the $8,500 owed by him to Mr Ferreira was a loan he had borrowed from Ferreira a long time before 1977, “back home” in order to buy a piece of land in Portugal. But, then he testified at the trial, that the land he bought in Portugal had been purchased in 1976 for $2,500 (not $8,500).

When interviewed in April 1979 by Mr Brunsveld, the plaintiff did not volunteer any information respecting approximate amounts spent by him for food, meat and groceries for his family during the years for which his income was being assessed. Mr Brunsveld suggested an approximate amount of $50 per week (for a family of six) in 1974 (one of the plaintiffs four children was born in 1974). Subsequently, in a meeting with Mr Brunsveld, where the plaintiff was accompanied by Mr Witen and Mr Toolsie, it was argued that the personal expenses in this category should be lower. (Mr Witen and Mr Toolsie had been hired by the plaintiff as advisors after the Department commenced its investigation.) Mr Brunsveld lowered his estimate, not because any documentary evidence was produced, but “as a concession”. He lowered his estimate to under $40 per week for meat and groceries in 1974. The net worth statement Mr Witen subsequently submitted to the Department on behalf of the taxpayer showed an estimate of $24 per week for this item — for a family of six. In evidence before me, the plaintiff admitted that he did not really remember what he had spent for these items during the years in question but avowed that the amounts had to be lower than those claimed by the Department. I did not find this credible, even accepting the plaintiffs testimony that he obtained some produce from a garden in Simcoe and kept chickens there.

The credibility of Mr Brunsveld was also put in issue. There is no doubt he seemed a hesitant and nervous witness; he was reluctant to answer questions categorically. Nevertheless, my impression is that he made every effort to give balanced and considered answers. I have no reason to doubt the veracity of his evidence.

Counsel for the plaintiff tried to argue that Mr Brunsveld did an inadequate job in preparing the net worth statement because he did not assiduously investigate the alleged loans claimed by the taxpayer (eg he did not attempt to obtain the services of a Portuguese interpreter and seek an interview with Mr Santos). Counsel argued that Mr Brunsveld did not adequately investigate the taxpayer’s pre-1973 assets. For example, it was argued that Mr Brunsveld should have taken into account the fact that the plaintiff allegedly brought $7,000 with him when he immigrated from Portugal in 1970 — even though the taxpayer did not declare this amount on the relevant declaration forms at the time of his immigration.

I do not accept the allegation that Mr Brunsveld did an inadequate job. What is more, it seems to me he bent over backwards to accommodate the taxpayer. He adjusted his original estimates continually to give the taxpayer every break, accepting the plaintiffs word even when the claims verged on the unreasonable. For example, when originally interviewed by Mr Brunsveld, the plaintiff indicated that he spent the family allowances on clothing for the children and $300 to $400 more per year for himself and his wife. The family allowance payments in question were $860 in 1974, $1,060 in 1975 and 1976, and $1,146 in 1977. Mr Brunsveld subsequently deleted completely the estimated expenditures for the children’s clothing on the taxpayer’s assertion that no more than $300 or $400 in total per year was spent by the family on clothing. Mr Brunsveld’s assessment accepted a sum of $100 for miscellaneous expenses even though he recognized that the normal amount appropriate to a family under this heading is $200 or $300 a year. He designated only $25 per year for gifts and $50 for house repairs. He did not accept the plaintiffs claims respecting the loans receivable.

It is not surprising that Mr Brunsveld did not accept the claims respecting the loans receivable. Apart from the fact that there was no documentary evidence, the way these were brought to his attention was in itself highly suspect. When Mr Brunsveld originally interviewed Mr Patricio in January 1979, Mr Patricio indicated that he borrowed money from friends but made no claim to having loaned out money to others. After Mr Brunsveld had prepared a first draft of the net worth statement in July 1979, of which he gave a copy to Mr Witen, Mr Witen responded by saying there should be opening loans receivable of $6,000. No specifics were given respecting to whom or in what amounts these loans existed. After further negotiations, Mr Brunsveld received in December 1979, a draft of a net worth statement prepared by Mr Witen which this time showed loans receivable on $13,000. One cannot help but conclude that the loans receivable were a conveniently elastic category.

Mr Toolsie argued that I should accept as corroboration for Mr Patricio’s claims respecting his assets in 1973 evidence of undeclared money he brought with him when he immigrated from Portugal, money his wife brought when she came in 1971 and income his wife earned in 1971 and 1972. Also, he argued that the plaintiffs frugal lifestyle, as demonstrated from his personal expenditure statement indicated that he could have saved a considerable amount of money in those early years. Also he argued that the plaintiff must have brought more money with him in 1970 than he declared because, otherwise, he would not have been able to purchase his first residence in January, 1971. This evidence is totally dependent on the plaintiffs own testimony; it does not provide corroboration to the claims being asserted. Indeed, even if such moneys were available pre-1973, there is no reason to believe they were retained as assets as opposed to being spent in some other fashion.

The Second Issue — The nature of the $800 payments made to plaintiff by Mr Oliveira in 1976 and 1977

Mr Brunsveld’s evidence was that originally the plaintiff indicated to him that two $800 payments, one in 1976 and one in 1977, received from a Mr Oliveira, were repayments of principal on account of $15,000 he had loaned to Mr Oliveira in 1975. Mr Oliveira is the plaintiffs brother-in-law. Accordingly, Mr Brunsveld’s first draft of the net worth statement for the years in question was prepared on that basis. Mr Witen, however, subsequently indicated to Mr Brunsveld that those sums were payments on account of interest — and consequently for tax purposes should be treated as deductions (pursuant to section 110 of the Income Tax Act). Mr Brunsveld accepted the representations as to the nature of the repayments but refused to treat them as deductions because they were interest received from a person with whom the taxpayer did not deal at arm’s length. (Refer: sections 110. l(2)(g) and 251(2)(a) of the Income Tax Act.) At trial, the plaintiff reverted to his original contention that these amounts were repayments of principal and not interest.

The conclusion I reach is that the $800 payments were repayments of principal. It seems clear that they were represented as interest to the Department by Mr Witen (and/or Mr Toolsie) because it was believed this was a more advantageous treatment for the plaintiff, without regard to the accuracy of those representations.

The Third Issue — Deductions for payments to non-resident dependants

In his 1974 income tax return, the plaintiff stated that he had spent $1,100 for the support of non-resident dependants. In 1975 he claimed $800 had been spent; in 1976 he claimed $2,200 had been spent and in 1977 $2,200.

In preparing the net worth statement for these years, Mr Brunsveld took these sums into account as amounts spent by the taxpayer. Not all were allowed for deduction purposes by the Department because receipts were lacking for some of them.

Evidence with respect to these payments demonstrates the unreliability of the submissions generally made by and on behalf of the plaintiff in this case. The statement of claim alleges that the Minister failed to allow a deduction claimed by the taxpayer for money sent to a non-resident dependant in 1976. The nonresident dependant was alleged to be a Mr Ferreira, the plaintiffs father-in-law, and the plaintiff claimed in his 1976 income tax form that $1,100 had been sent (entitling the plaintiff to a deduction of $780).

The plaintiffs estimate in his net worth statement, originally sent to the Department by Mr Witen on behalf of the taxpayer, showed personal expenses for the year 1976 which included this sum of $1,100 as part of the total $2,200 spent in 1976; it also showed $2,200 as having been spent in 1977. That is in accordance with the income tax returns filed by the plaintiff for those years. On the examination for discovery the plaintiff, in July 1981, denied having made any non-resident support payments in 1977 but stated that he had sent money in 1976. In evidence before me he agreed that he had sent the sums in question to Portugal in 1977.

Mr Toolsie argued that the defendant could not both claim that the taxpayer had spent the sums in question (in the net worth statement) but refuse to allow the taxpayer deductions on account of those amounts. The statements in the tax returns indicate that the taxpayer spent the money in question and so they are properly included in the net worth statement. That does not mean, however, that the person to whom they were sent actually qualified as a dependant under the Act, or that the sums were sent for the support of that person.

I conclude, on the basis of the evidence that the net worth statement properly included the sums sent to Portugal. In addition, no argument was made to me which would lead me to believe that the Minister was incorrect in refusing to allow the deduction.

Penalty

The penalty assessment is justified if one can find that the plaintiff “knowingly, or under circumstances amounting to gross negligence . . . has made or acquiesced in the making of a false statement or omission in a return . . .”’ (subsection 163(2)).

I was struck by the fact that the plaintiff was very much aware of the necessity of keeping accurate records for the purpose of claiming expenses against income but he seemed to be conveniently blind to the fact that one should keep equally careful records in order to account for revenue. As noted above, much was made of the fact that he had a limited knowledge of English, and limited formal education. I formed the impression that these facts were being used as a convenient excuse to avoid hard questions, as a means of attempting to explain contradictions in his evidence, and as an excuse for his incomplete approach to reporting his income. In my view, the extent to which he did not know what was required by the tax system was the result of purposely choosing to wear blinkers rather than mere carelessness or simple negligence. In coming to this decision, I have considered the decisions in The Queen v Columbia Enterprises, [1983] CTC 204; 83 DTC 5247 and Venne v The Queen, [1984] CTC 223; 84 DTC 6247 which were cited to me by counsel.

The plaintiff was obviously annoyed by the fact that the discrepancies assessed by the Minister were not large amounts. I notice in the jurisprudence that when the discrepancies are large there is a tendency by the courts to more easily find gross negligence. When the discrepancies are large it becomes difficult to believe that a taxpayer could have inadvertently failed to notice the discrepancy (even when relying more or less completely on an accountant to make out the return). Thus, large discrepancies may often be a compelling feature leading to a finding of gross negligence. However, the discrepancies assessed do not have to be large to constitute gross negligence. A determination of gross negligence is one that is to be made in the light of all the circumstances of the case.

In the light of all the circumstances of this case, I conclude that the Minister properly imposed the penalty assessments.

Limitation section

Counsel for the plaintiff argued that in any event the Minister was statute barred from reassessing the plaintiff for the 1974 taxation year. Counsel for the defendant argued that it was not now open to the plaintiff to raise this defence since it had not been raised in the pleadings. Having found that the defendant appropriately assessed the plaintiff on the basis of gross negligence, it is automatically open to the defendant, under subparagraph 152(4)(a)(i) to reassess the plaintiff beyond the four-year limitation period otherwise applicable. All that is required under that section is neglect or carelessness.

Accordingly, the appeal will be allowed only to the extent of requiring reassessment on the basis that the $800 payments in 1976 and 1977 from Mr Oliveira should be treated as principal and not interest. The defendant is to have her costs of this action.