Samra v. MNR, 92 DTC 1008, [1991] 2 CTC 2653 (TCC)

Bowman, T.CJ.: —These appeals were heard together on common evidence. In each case the appellants appeal from reassessments for their 1984, 1985 and 1986 taxation years.

Although the pleadings raise a number of issues, at trial the questions between the parties were narrowed to four:

(a) With respect to the corporate appellant, 366782 Ontario Ltd. ("the Corporation")

(i) whether in 1984 it realized a taxable capital gain of $7,073;

(ii) whether in 1984, 1985 and 1986 it was entitled to capital cost allowance in the amounts claimed by it or whether the Minister was justified in disallowing capital cost allowance in those years of $1,919, $1,021 and $4,612;

(iii) whether in 1984 and 1985 it was entitled to an investment tax credit in the amounts claimed by it or whether the Minister was justified in disallowing the amounts of $13,682 and $15,091 respectively;

(b) With respect to the appellant, George Samra, whether the Minister was justified in including in his income for 1984 and 1985 the amounts of $34,700 and $61,762.61 respectively as appropriations from the Corporation.

The facts, to the extent that I was able to ascertain them from the evidence, are that in 1973 Mr. Samra acquired a building in Richmond where he lived and operated a restaurant known as the Richmond Steak House. In 1978 Mr. Samra sold the building to the Corporation and a joint election was filed in which the following amounts were agreed upon for the purposes of subsection 85(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"):

These figures appear in the Corporation's opening balance sheet as at April 1, 1978. Presumably the residential portion of the building was Mr. Samra's principal residence.

The Corporation sold the Richmond Steak House business in 1980, but kept the land and building, which it leased to the purchasers. In 1984, the Corporation sold the land and building and other assets to an unrelated Ontario company for $74,500. The Minister computed the gain on this sale at $14,146, one halt of which he included as a taxable capital gain in the Corporation's income for 1984. The figures used in the Minister's computation of the cost of the property sold are as follows:

These figures are precisely the same as those found in the Corporation's balance sheet for 1984 prepared by Mr. John B. Kocher, a chartered accountant for the appellants, who appeared both as their agent, that is to say in the role of advocate, and as their witness. He was unable to explain the discrepancy between the figures used in the section 85 election made in 1979 and the figures in the corporate balance sheet for 1984. The financial statements for the intervening years were not produced.

In the absence of any evidence to the contrary, I must accept the correctness of the Minister's computation of the capital gain realized by the Corporation in 1984.

The second issue has to do with the claim for capital cost allowance and investment tax credits by the Corporation. The critical question is the amount that the Corporation paid to construct in 1984 a 20-unit motel which it added to the Coach House Restaurant.

The Corporation's position is that the cost was $444,851.63, based upon calculations made by Mr. Kocher. He submitted a list of expenses compiled by him to substantiate the cost of the addition of the motel in 1984. The list had previously been submitted to the Departmental assessor, Mr. Charles Rafuse, who examined each item and reviewed all of the supporting documentation that was made available to him—invoices, cancelled cheques as well as the cash disbursements journal. He concluded that the most that could be allowed as the cost of the motel was approximately $380,000, and even in this he believed that he was being generous in that in a number of cases he based his allowance of items on only one piece of supporting evidence, such as an invoice, even if a corresponding journal entry or cancelled cheque were missing. By way of example of the items which he disallowed, two relatively large expenditures on Mr. Kocher's list were evidently unsupported by journal entries or cancelled cheques: $10,095 allegedly paid to FBM, a building materials company, and $24,850 allegedly paid to Pioneer Nursery. I find it difficult to understand how expenditures of this magnitude, if made, would have no supporting documentation. Moreover, he testified that of the $444,851.63 claimed as the cost of the motel some $64,000 had already been charged and, where substantiated, allowed as ordinary operating expenses.

In addition to Mr. Kocher's schedule a letter from Eastern Ontario Development Corporation was adduced in evidence. It contained details of the type of financial assistance that organization was prepared to extend to the Corporation in building the motel and details of the expenditures that it was prepared to accept for the purposes of the program. I accepted the letter as evidence that it had been sent and received and that certain claimed expenditures had been approved by the Eastern Ontario Development Corporation, but it is not evidence that the expenditures had been incurred by the Corporation.

Some attempt was made to explain the absence of documentary corroboration of the expenditures on the basis that the documents had been sent to Eastern Ontario Development Corporation and did not find their way back to the appellant. I find this explanation both unsatisfactory and conjectural.

Mr. Kocher invited me to conclude that the motel must have cost more than the Minister assumed it did on the basis that it was common knowledge that the per unit cost of a motel at that time would yield a figure more consistent with the appellant’s position than the respondent's. No evidence was adduced on this point. The matters of which a court may take judicial notice do not include the per unit cost of motels in Kemptville, Ontario in 1984.

While I accept that no provision of the Income Tax Act requires that such expenditures be supported by documentation such as invoices, receipts or cancelled cheques (See Weinberger v. M.N.R., [1964] C.T.C. 103; 64 D.T.C. 5060), there must be at least some acceptable and admissible evidence before the Court if the presumption of correctness of the assessment is to be rebutted. Accordingly, the claim for additional capital cost allowance must fail on the basis that the Corporation has not shown that its cost of the motel was any more than that which the Minister allowed.

The claim for investment tax credits in respect of the motel must also fail, but for a different reason. Investment tax credits are available in respect of the capital cost of certain types of property that is to be used primarily for the purpose of manufacturing or processing of goods for sale or lease. Mr. Kocher acknowledges that such credits are not available in respect of the restaurant because it had been used as a restaurant before the Corporation acquired it. He also acknowledges that the motel standing by itself would not be qualifying property for the purposes of the credit. He submits, however, that by joining two components:

(a) a restaurant that would qualify for the credit if it were new; and

(b) a new motel that would not qualify by itself,

the non-qualifying motel is somehow transferred into qualifying property. I do not think that I need to give extensive reasons for rejecting the proposition. Property that otherwise qualifies for the credit under subsection 127(5) does not in the normal course cease to qualify solely because it is connected with non-qualifying property. The converse, however superficially attractive the logic may appear, does not follow. It is contrary to common sense and to the purpose of the incentive as enunciated in Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79; 85 D.T.C. 5310.

Finally, I must deal with what is for me the most troublesome aspect of this case. The Minister assessed Mr. Samra on the basis that he had appropriated some $34,700 and $61,762.61 from the Corporation in 1984 and 1985 and was therefore taxable on it under subsection 15(1) of the Act.

Mr. Rafuse gave detailed evidence for his conclusion that these amounts were appropriated to Mr. Samra. In the case of the $34,700 he found that of the $74,500 for which the building in Richmond, Ontario, was sold, $34,700 was credited to Mr. Samra's loan account. He also concluded that $61,762.61 was transferred to Mr. Samra's bank account. Copies of the bank records were adduced in evidence.

Mr. Rafuse's evidence was meticulous and detailed. He was barely cross- examined on it. It was suggested that this was not really an appropriation but a case of the shareholder and the Corporation intermingling their funds for ease of payment of the cost of the motel. It is conceivable that this explanation might be true. Unfortunately, the evidence adduced in this Court simply does not come within hailing distance of demolishing the basic facts upon which the assessments are founded.

On the evidence before me I have no alternative but to dismiss the appeals by both Mr. Samra and the Corporation. I do so with a disquieting suspicion that portions of the assessments may well be wrong. There may well be a chance that the motel cost what Mr. Kocher says it did. I also have doubts about the correctness of the taxation of the alleged appropriations. But that is all they are: disturbing doubts and suspicions. That is not enough to justify my overturning a reasoned assessment that was prepared and explained with care and specificity and was not rebutted. One aspect that concerned me about the alleged appropriation of $34,700 is that it appears to be based on a mere book entry—a credit to Mr. Samra's loan account with the Corporation. As a matter of law this is not, without more, an appropriation. In Gresham Life Society v. Bishop (1902), 4 T.C. 464 at 476, Lord Brampton said:

My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by businessmen. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst businessmen is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.

On the evidence—or lack of it—I would have no way of determining whether this principle might have any application. An evidentiary foundation ought to have been laid and the matter argued. It is not, however, the function of the Court to usurp or assume the role of the taxpayer's counsel or representative.

This case was a difficult and complex one, with a multitude of factual, legal and accounting questions. The result might have been different had it been presented with some regard to the rules of onus of proof, evidence and law, a knowledge which is required in a complex field such as tax litigation. Very few members of the bar have the temerity to engage in this difficult and technical field of practice. When members of other professions, however well qualified they may be in their own field, seek to do so they put their clients at risk in the same way as would a lawyer who performed an audit or certified a financial statement.

The appellants’ representative appeared both as his agent for the purpose of arguing the case and as their principal witness. For a member of the bar to appear as counsel and as witness in the same case has, in some instances, been tolerated but it has been deprecated in the strongest terms: Phoenix v. Metcalfe (1975), 48 D.L.R. (3d) 631; [1974] 5 W.W.R. 661; Stanley v. Douglas, [1952] 1 S.C.R. 260; 4 D.L.R. 689 at 695. In other cases it has not been permitted at all: A & E Land Industries Ltd. v. Saskatchewan Crop Insurance Corporation, [1988] 3 W.W.R. 590; R.C. Archiépiscopal Corp. v. Rosteski (1958), 13 D.L.R. (2d) 229.1 can think of no reason for applying a less rigorous rule where a taxpayer is represented by someone who is not a member of the bar. While there may be sound practical and economic reasons for permitting a taxpayer in small and simple cases to be assisted and represented by non-qualified agents, the magnitude and complexity of this case required that the appellants be represented by counsel who could call witnesses and adduce evidence in the ordinary way without being in the fundamentally irreconcilable and paradoxical position of being both advocate and witness in the same cause.

I am reluctant to dismiss an appeal on the basis of onus of proof—a principle that is cited with unnecessary frequency in income tax appeals—but it is fundamental that if a taxpayer wishes to challenge an income tax assessment he or she must at least make out a prima facie case that on a balance of probabilities the assessment is based on a misunderstanding of the facts or an erroneous premise of law. This has not been done here.

The appeals are dismissed.

Appeals dismissed.