Tony Mele Incorporated v. The Queen, 85 DTC 5196, [1985] 1 CTC 252 (FCTD)

Cullen, J:—This action, and one involving Mr Tony Mele personally, came on for trial at London, Ontario on the 15th day of January 1985. Counsel agreed that these two actions be tried on common evidence.

The plaintiff is a company incorporated pursuant to the laws of the province of Ontario, and controlled by Tony Mele.

By notice of reassessment, dated the 6th day of January, 1982, the Minister of National Revenue (“Minister”) reassessed the plaintiff for its 1980 taxation year by adding to the plaintiffs 1980 taxation year $17,100 for allegedly overstated subcontracts expense.

By notice of objection dated the 22nd day of March, 1982, the plaintiff objected to the 1980 reassessment.

By confirmation, notice of which was dated the 3rd day of September, 1982, the Minister confirmed the plaintiffs 1980 reassessment.

The plaintiff alleges the sum was a subcontract expense for the purpose of gaining or producing income from its business or property and should have been allowed as a deductible expense for the plaintiffs 1980 taxation year.

The plaintiff did not plead that these advances were loans but led evidence to that effect in response to the defendant’s pleading which reads, in paragraph 8 of the statement of defence, “The Deputy Attorney General of Canada respectfully submits that if the payments were loans to the said Joe Serratore [emphasis mine] they were therefore in any event, outlays of capital and may not be deducted in computing the income of the appellant for 1980 taxation year by virtue of 18( l)(b) of the Income Tax Act”.

The defendant for its part denied the $17,100 was a subcontract expense, and was not for gaining or producing income from its business and so reduced the subcontract expense by that amount.

As is usual and required in income tax cases, the Minister in reassessing the plaintiff made certain assumptions, namely:

(a) the Plaintiff is a Canadian resident corporation, the controlling shareholder, director and officer of which is one Tony Mele, which carries on the business of an interior carpentry contractor;

(b) the Plaintiff paid $17,100.00 in the 1980 taxation year to one Joe Serratore, composed of the following payments (“the payments’’) on or about the following dates:

February 14, 1980	$2,900.00
February 27, 1980	$7,200.00
March 6, 1980	$2,000.00
April 25, 1980	$5,000.00

(c) the expenses were not made in respect of subcontract expenses incurred by the Plaintiff, nor were the payments made in respect of expenses incurred by the Plaintiff for the purpose of gaining or producing income from a business.

There is no dispute that $17,100 was paid to a Mr J Serratore, and the amounts and dates of the advances are the following:

Mr Robert Wiseman, a government employee, was the assessor for the Department of National Revenue. Counsel for the plaintiff makes the point that Mr Wiseman made all the decisions vis-à-vis these two cases including Mele and Mele Inc. Counsel for the defendant cleared the air effectively on the examination for discovery and is quoted as stating at page 4, line 15 of the transcript:

“MR TAYLOR: That’s right but the recommendation, the auditing, the assessing and recommendations for reassessment of Mr Mele corporately and personally was done by Mr Wiseman, not any other officer”.

The thrust of the questions on discovery to Mr Wiseman are, “You made an assumption and upon what facts did you rely?” Counsel for the plaintiff, using his criteria, accepted the first two assumptions made by the Minister in 5(a) and

(b) of the statement of defence on the following grounds, namely: with respect to 5(a) he states: “I do not think there is any doubt that that is in fact the situation. He got it from the tax returns”. On (b) he states, “So I submit there is no doubt as a matter of fact that there were payments to Serratore as stated in 5(b)”. Counsel for the plaintiff, in developing his line of argument, says, “The Minister’s official, Mr Wiseman, reviewed the cancelled cheques provided by the Company and came to that conclusion”. The Minister is not reaching a conclusion but rather making an assumption. If the auditor had no cheques, or no return and no information from the taxpayer, he is still able to make assumptions. Assumptions cannot be rebuffed solely on the grounds that the auditor was unable to get facts to support his assumptions. In a self-assessing system the onus rather is on the taxpayer to dislodge these assumptions.

Mr Wiseman said at one point, (Page 7, Q 50 examination for discovery), “I was given no particular business reason why these were subcontract expenses, what work performed by Mr Serratore in order to pay his subcontract income.”’ and later, “There was no reason given to me of why these amounts were claimed as expenses for income tax purposes”.

As counsel for the defendant puts it, “There is no law that says an assumption falls by showing that the Minister had, if you take all the tests, insufficient evidence to make that assumption. The assumption is there to put the taxpayer on notice of what case he has to meet”.

Only one witness was called by the plaintiff, Mr T M Garnier, to give evidence to rebut the assumptions, and to establish that the plaintiff was in the money- lending business. He also relied on the examination for discovery of Mr Wiseman. We did not hear from Mr Mele or Mr Serratore nor the firm’s accountant each of whom in my view could have supplied us with the best evidence. This point was raised by the Court:

THE COURT: Well, it is your case, Mr Giffen, and I am somewhat surprised that we are not going to have the benefit of the best evidence rule here. That is your choice, of course.

MR GIFFEN: Yes. There is also the question of onus, My Lord, and I will be taking the position possibly that the onus has shifted to my friend by virtue of the transcript

— by virtue of the transcript in the evidence before, or the discovery taken by Mr Wiseman.

THE COURT: Well, I will be interested in listening to that because, as you know, it is rather a unique rule that the onus does shift to the taxpayer under normal circumstances and the Crown has an obligation to maintain on what basis it made its particular findings and then your onus is quite heavy to offset — but I am not going to tell you how to run your case.

I listened and later read the evidence of Mr Garnier very carefully, recognizing that this witness had been called by the plaintiff to rebut the assumptions made by the Minister and to provide the evidence that the plaintiff was in the money- lending business. Counsel for the plaintiff maintained that the examination for discovery of Mr Wiseman proved he had not considered the fact that the plaintiff was in the money-lending business, and therefore an assumption of that fact could not be made, and the onus shifted to the Minister. He maintained, “Now the Minister proceeded as they usually do with the assumptions, and I will be making during argument the difference in the question of onus between assumptions that are made at the time of the reassessment and the assumptions that he . . . may be made by the pleadings and I will be taking the position, and I will be submitting authorities in support of it, that in assumptions made at the time of the reassessment the onus is on the taxpayer but in assumptions that are made by the pleadings the onus shifts to the Minister”.

Returning then to Mr Garnier’s evidence he seemed at the outset quite straightforward about the use Mr Serratore was to make of the money advanced, but later on in his evidence he was asked:

Q Looking through the global amount of these cheques, do you know if the cheques to Serratore — do you know what purpose a gain 1s?

A Well, it was supposed to be a business that Mr Serratore was going to get into. Mr Serratore was getting into business buying either property or — he had a restaurant that caught on fire at one time, in ’78.

Q Yes.

A And I assume that that is what it was for, for the amount in the restaurant. Later I heard it was for buying property. Speculation.

Assumptions and hearsay but no real knowledge of the reason for the money being advanced. Certainly no real knowledge that the money was advanced as a subcontract expense for the purpose of gaining or producing income from Tony Mele Incorporated’s business or property.

Mr Garnier makes a small concession that his memory was assisted by Mr Mele on the drive to the lawyer’s office. “All he asked me was if I remembered any loans that he gave Serratore”. [Emphasis mine.] He then suggests, “we talked about a lot of things’’, but they did not discuss amounts, interest or any promissory note. Given the fact that he had been picked up as a possible witness for the plaintiff, for a specific purpose, namely to visit Mr Mele’s lawyer, I find it difficult to accept that other matters involving the case were not discussed. Even the use of the word loan however makes Mr Garnier’s evidence now suspect at worst, and weak at best.

We must look to Mr Garnier and his involvement with the proceedings. It is also necessary to examine the whole history of events, even though the case concerns itself solely with the $17,100 advanced to Mr Serratore.

In the record it is established that in addition to the four cheques totalling $17,100, a series of other cheques were signed by Mr Mele and drawn on the plaintiffs bank account with the Bank of Montreal, namely:

These advances were apparently all made at a small office of Continental Furniture at 790 Dundas Street in London, Ontario. Mr Garnier was an employee of Continental and this office was his base of operations. One Mr Marsilio De Dominicus was his boss and owner of Continental. The evidence is that this building, and the office, was a hangout or meeting place for a number of people of Italian extraction, although Mr Garnier was French-Canadian and spoke no Italian.

When shown cheques drawn in 1978, he was able to describe in some detail their source, how they came to be used, the amounts on the face of them, and the actions and activities before and following Mele’s signing them and that cheques could not be cashed by Serratore until certified. Despite providing this detailed information he could not remember what he did prior to 1973. His own evidence is that he met Joe Serratore in 1978 at Continental Furniture “when he came in to borrow money to go into business’’ and when asked from whom, he said, “He was asking Mr Mele and Mr Mele was telling him his company would lend him some money. Let’s remember, however, that Mr Garnier was not always in the office, and further, these cheque signings were always done after “two or three hours arguing. Sometimes four’’. His evidence also is they spoke one-half English and one-half Italian. I think it is accepted that bilingual individuals tend to revert to their first language when talking money and business and Mr Garnier’s estimate of half English and half Italian is suspect, but if even one-half was Italian, Mr Garnier could not understand that part. Although a group of men of Italian extraction dropped in often, had meals with the owner and although Mr Garnier was a participant, he didn’t know the surnames of two or three of them. Although he gave detailed evidence about the cheques, he could not remember one for $650 paid to a Mr Diorio. With all of the arguing taking place between the principals, “sometimes for four hours”, it stretches credulity to accept that Mr Garnier was paying that close attention to a deal or deals not affecting him, when “half the time they spoke Italian” and he was supposed to be working.

The assumptions of the Minister have not been dislodged.

Putting the best light on the plaintiffs case and even accepting a shift of onus, which I do not on the facts of this case, the plaintiff would still have to establish that it was in the money-lending business. It has failed to do so, and no case therefore remains to rebut. Mr Garnier’s evidence is suspect and barely credible. Also he could not be expected to know if Tony Mele Incorporated was in the money-lending business. He could of course give no evidence about the objects of the company, when it allegedly got into the money-lending business, why no lien or charge was put on the Serratore restaurant furniture stored at Continental, nor whether these transactions were recorded in the minutes of the corporation or in its financial records. Other witnesses certainly were available to the plaintiff including Mr Mele himself, and it is left to speculate the impact he might have given to the suggestion that Tony Mele Inc was in the money-lending business.

We also have an undated document, Exhibit 14, allegedly an acknowledgement by Serratore of his indebtedness to the plaintiff, but without any date one is left to speculate when it was signed and for what purpose at this late stage, ie, after all advances had been made. Why was there no similar document from the others who received advances? No legitimate money-lender would conduct itself in a fashion where no security is asked, no interest rates are shown and no repayment date indicated.

This case is confined to the $17,100 advanced in 1980 to Mr J Serratore. Mr Garnier is asked in cross-examination at page 70ff of the transcript:

QO Tab 12, March 6, 1980, $2,000. Were you there when that was negotiated?

A No, I was not.

Q You were not. Do you know anything about that cheque?

A All I know is that Serratore was to borrow money. He still had his stuff in the back warehouse of ours.

QO Okay. And this was the month the business was sold.

A Right.

QO And that was the end of Continental Furniture.

A We still had the warehouse even after the building was sold.

And later, at page 73 of the transcript:

Q Were you around for the discussion that took place between Mr Mele and Mr Serratore?

A No.

QO So you do not know anything about discussions that took place between Mr Mele and Mr Serratore in 1980, on these 1980 loans [Emphasis mine.]

A Not really.

Q Okay, so you do not know about terms of repayment or anything of that nature?

A Only from ’78.

The assumptions of the Minister have not been dislodged. The plaintiff has not pleaded it was in the money-lending business, nor in my view if it had, would the evidence adduced support that contention. In a self-assessing system the requirement is that the taxpayer make a credible case for its position. This it has failed to do.

Accordingly this action is dismissed.

Appeal dismissed.