Sidhu v. MNR, 93 DTC 5453, [1993] 2 CTC 278 (FCA)

Mahoney, J.A. (Robertson and McDonald, JJ.A., concurring):—This section 28 application seeks to set aside a decision of the Tax Court of Canada on an appeal from an income tax assessment conducted under its informal procedures. It was heard with seven others. [1] The applicants are four equal partners in a partnership carrying on a farming business and the spouses of those four partners. The Minister reassessed the partners' personal returns for the years 1984 to 1988 inclusive, disallowing the deduction of wages claimed to have been paid by the partnership in 1984, 1985 and 1986. The partners' 1987 and 1988 reassessments were consequent on the reduction of losses carried forward and those of their spouses related to a consequent reduction in child tax credits. The only question, therefore, is as to wage expense in 1984, 1985 and 1986.

The general background is accurately stated in the applicant's memorandum.

9. The partnership employed, in the relevant years, farm workers, many of whom spoke little, if any, English were transient, illiterate and uneducated. Most of these employees while employed by the partnership lived in cabins provided by the partnership.

10. The partnership paid its employees on a seasonal basis since most of the farming revenue was received toward the end of the farming season. However, during the farming season some employees received cash advances from the partners and the partnership for immediate necessities.

11. The partnership prepared and issued payroll cheques to employees at the end of the farming season with some payroll cheques being signed over to the partners and redeposited in personal and partnership bank accounts in recognition of advances made by the partners and the partnership to the employees during the farming season.

12. Auditors for Revenue Canada, Taxation disallowed the deduction for wage payments where payroll cheques were signed back to the partners or the partnership because a detailed reconciliation of cash advances made to employees by the partners and the partnership was not retained.

The evidence was to the following effect:

The amounts disallowed were conceded to be reasonable. The only issue was whether they had been paid.

The learned deputy judge held:

But the issue is this, whether or not the wages claimed as farm expenses were paid to the employees and that the amount of them has been sufficiently established, and whether the Appellants are entitled to claim those expenses against their farm income. The farm operated at a considerable loss on its books at least.

It is not an easy case in my view. Because I am quite satisfied that this is the sort of way in which these farm operations are carried on in various parts of the Fraser Valley and perhaps at other places. The migrant farm workers do need to have advances. They often are unable to speak or understand English and they may wish to take advantage of the Unemployment Insurance Act in cases sometimes where other citizens consider that they ought not to and that it is a breach of the law to have done what is suggested in this case.

But in any event, I am satisfied that that is the way that many of these farm operations are carried on because of the nature of the farming operation, the seasonal work that needs to be done, the necessity to pay in cash, many of these people having no bank accounts and probably having great difficulty in cashing cheques. So much of it probably has to be done in cash.

Having said all those things, I have to consider as well that the law requires every person, every taxpayer who is in business to keep proper books and records. And if they do not, they cannot expect to have their claims for expenses allowed by Revenue Canada. It is quite clear that that is the law. If you do not keep proper books and records, then you have to suffer the consequences. Sometimes people get away with it but it just — an absolute requirement and particularly those people who are in business. Now this was a substantial business, one in which substantial sums of money are involved, $200,000 or $300,000.

The employees may have been paid in this manner but there is insufficient record of it in my view.

In my view, the Minister is correct in not allowing the wage expenses claimed and I dismiss those appeals.

The sole reviewable question is whether the learned trial judge reached his conclusion on the basis that the applicants had not discharged the onus on them to establish, on a balance of probabilities, that the wages in issue had been paid or whether he concluded that the failure to keep proper records was in itself fatal to the claimed deduction. If the former, his conclusion is unassailable; if the latter, it is based on an error in law.

The learned trial judge rejected the respondent's argument that the claimed payment of wages by cash was a manifestation of an unemployment insurance scam and, giving effect to that, disallowed penalties imposed by reassessment. At no point did he express or imply an adverse finding as to the credibility of the applicant's evidence. He clearly accepted that cash advances are an inevitable feature of the employment in issue. He characterized the requirement of subsection 230(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as absolute and based his decision to affirm the reassessments on the conclusion, which I repeat, that:

The employers may have been paid in this manner but there is insufficient record of it in my view.

I think it inescapable, on a fair reading of the reasons, that the conclusion was based on the failure to keep records.

The requirement of subsection 230(1) may fairly be characterized as absolute but the consequence of not complying is liability to conviction of an offence under subsection 238(2), not necessarily a conclusion that transactions which ought to have been recorded did not occur. The failure to record transactions will inevitably handicap a taxpayer seeking to discharge the burden of proving that they took place but the responsibility of the trial judge in such circumstances is to decide, on a balance of probabilities having regard to all the evidence and its credibility, whether any, all or none took place. The proper approach was demonstrated by Strayer, J. in Schwartz v. The Queen, [1987] 2 C.T.C. 12, 87 D.T.C. 5274 (F.C.T.D.) at page 14 (D.T.C. 5275):

The law places the onus on the taxpayer in such cases to prove wrong the Minister’s reassessment on the basis that the taxpayer is in a better position to prove what actually happened, if he chooses and is able to do so. Unfortunately, the plaintiff has not been willing or able to particularize in any way the purchases made by him. He has confirmed on many occasions that the figures provided by his accountant as to his total purchases were correct. If he had made any effort to corroborate this and if his oral evidence had seemed forthcoming and credible, it might have been possible to find in his favour even in the absence of any vouchers, receipts, or other written records. Unfortunately neither of these requirements were met.

This section 28 application will be allowed, the decision of the Tax Court set aside and the matter remitted for reconsideration on a basis not inconsistent with these reasons. In view of the amounts of the tax involved, it would be unfortuante if the appeals had to be completely reheard. If the same judge is not available to reconsider his decision, the appeals will have to be reheard on such basis as the parties may agree or the Tax Court direct.

Application allowed.