Morris v. The Queen, docket 97-2-IT-G

Date: 19990406

Docket: 97-2-IT-G

BETWEEN:

DAVID W. MORRIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Garon, A.C.J.T.C.C.

[1] This is an appeal from the income tax assessment made by the Minister of National Revenue (the "Minister") for the 1991 taxation year. By his assessment, the Minister included an amount of $42,680.00 in the Appellant's income representing professional fees allegedly received by the Appellant, during the 1991 taxation year, in addition to the amount originally declared by the Appellant in his return of income for the same year. In addition, the Minister assessed penalty on the Appellant in respect of the failure to include the aforementioned amount.

[2] The Appellant, for his part, admits that he received an amount of $20,000.00 (which he had not originally included in his return of income) and alleges in his Notice of Appeal that he received the latter amount in circumstances in which he reasonably believed it to be a gift, but he denies that he received the amount of $42,680.00.

[3] The Appellant, who acted for himself, testified on his own account.

[4] The Appellant is a lawyer and a businessman. He was raised in a business environment, his father being the principal shareholder of a company operating a wholesale grocery, Morris Wholesale Limited.

[5] The Appellant was admitted to the New Brunswick Bar in 1976 and by 1991, the year in issue, he had 15 years experience as a lawyer. He was and still is a sole practitioner in what is now the City of Mirimachi (formerly Newcastle) in the province of New Brunswick. He was engaged in the general practise of law notably commercial law and real estate law.

[6] Besides his law practise, the Appellant was the sole shareholder of Opera House Ltd. This firm owned a night-club and restaurant and the Appellant ran that business. The gross revenue of this firm would be around three-quarters of a million dollars per year in the 1990s. He spent a fair amount of his time managing this firm. He also owned 50% of the shares of the capital stock of Blue Stone Enterprises Ltd., which was established in the late 1970s or early 1980s. That firm has been in the residential development business. The other 50% shareholder in Blue Stone Enterprises Ltd. is an individual related to the Appellant. The Appellant also owned 5% to 10% of the shares in the capital stock of the firm Morris Wholesale Limited referred to earlier, which employs about 30 persons. The Appellant was not on the payroll of the latter firm. On occasions, he devoted some time to that business. A few years ago, the Appellant also set up a general insurance company, selling insurance contracts through a licensed agent, by the name of Heritage Insurance Limited. He owned 50% of the capital stock of that Corporation and is a Director in that Corporation.

[7] The Appellant related that in his capacity as a lawyer, he was engaged from time to time by Mr. Donald Taylor and provided services at the latter's request to a number of companies in which Mr. Taylor had an interest, which included Hall Industries Ltd., D.R. Taylor and Edon Enterprises Ltd. ("Edon"). The Appellant had known Mr. Taylor, one of the two shareholders of Edon, in the early 1980s and possibly in the late 1970s, the other shareholder being Mr. Ed McKibbon.

[8] The Appellant mentioned that in the late 1980s his services were retained by Edon to deal with a claim relating to an alleged breach of contract by the New Brunswick Government over the construction of an office building that was to be carried out by Edon and, subsequently, rented out to the same Government. After Edon had done some preliminary work on the grounds on these properties situated on Pleasant Street in the locality then known as the Town of Newcastle, the New Brunswick Government cancelled a letter of commitment involving the construction of the above building. The matter of the claim against the New Brunswick Government was very complicated, according to the Appellant. His client was seeking a substantial amount as compensation for damages in respect of this breach of contract. In his work for Edon, most of the Appellant's dealings were with Mr. Taylor, occasionally also with Mr. McKibbon. It was understood between the Appellant and Mr. Taylor that the handling of such a case would go outside the parameters of the Appellant's general practise and that he would be required to engage a larger legal firm to institute any lawsuit that would probably ensue. It was expected that legal proceedings would be required because the initial contacts with the officials of the New Brunswick Government did not produce any positive response. The Appellant recognized that he was the one negotiating on behalf of his client with the representatives of the New Brunswick Government; he was also the one who met with the client's representative, Mr. Taylor. The Appellant was to do the legwork and open contact with the New Brunswick Government. In line with the arrangements made with Mr. Taylor, the legal firm of Mockler Allen & Dixon of Fredericton was retained.

[9] The Appellant also disclosed that another property situated on Henry Street was involved in the negotiations between the Government of New Brunswick and Edon on account of the fact that the New Brunswick Government refused to renew the lease. The Government wanted to rent on a month to month basis. Edon has served a notice to vacate on that Government if it was not prepared to pay a certain rental. The precise nature of the dispute was not defined.

[10] The Appellant indicated that in New Brunswick lawyers are allowed to be paid for their services on a contingency basis. The Appellant asserted that when he had recourse to that practise, he charged his clients on a basis ranging from 15% to 20% of the amount of the settlement. In other cases, his hourly rate would vary but would be in the vicinity of $100.00 during the years 1988 to 1991. The Appellant stated that it did not happen often that he was paid on a contingency basis, in not more than three cases per year. In many instances, the Appellant would not discuss fees at the time his services were retained but later on. He would send the bill and the client would pay. Most of the work he did was covered by the applicable tariff for professional fees. The Appellant testified that when he was paid for his services on a contingency basis he would not always have an agreement as to the percentage right at the start. In such cases, his secretary would keep some record as to the time spent on a particular file.

[11] The Appellant testified that his services were retained by Edon at the outset on a contingency basis. More precisely, the Appellant testified as follows in respect of the basis of his remuneration for his services in respect of the above-mentioned matters involving Edon and the New Brunswick Government:

MR. VÉZINA: ...there was a possibility that this case would never go in court. When...when Mr. Taylor stepped in your office and talked to you about the case, you thought there was a possibility about settling the case, didn't you?

MR. MORRIS: Yes, I did. Yes.

MR. VÉZINA: On that basis, did you agree with him that if there was to be a settlement, you yourself would get a...be...you would be paid on a contingency basis in the vicinity of...from fifteen to twenty percent of the total settlement?

MR. MORRIS: No. We...we didn't discuss fees on a percentage to me based on it not going to court when we commenced doing the work on this file.

MR. VÉZINA: You just agreed that you would be paid on a contingency basis?

MR. MORRIS: If the matter had of been litigated the fees I charged would have been a contingency basis, yes.

MR. VÉZINA: But what in fact happened is what you were paid at the end of the day on a contingency basis, isn't it...isn't it what happened?

MR. MORRIS: No. My bill was for the time I had spent on the file.

MR. VÉZINA: Yeah, but you said earlier that you never recorded any hours of your work done on that file.

MR. MORRIS: Yes, I said that. Yes.

MR. VÉZINA: So how can you expect to be paid per hour because if you're not paid on a contingency basis then you're being paid by hour so how can you explain that to me?

MR. MORRIS: Because my secretary kept the time. I...I had said that.

MR. VÉZINA: But you never seen the time you've put in the file?

MR. MORRIS: Well I said I...I don't remember what the times were but I mean like it is seven years ago; I did have more than one file and more than one business on the go so a lot of things pass over my desk but...

[Transcript at page 118, line 17 to page 120, line 21].

The Appellant also made the following remarks in connection with the payment for his services:

MR. MORRIS: The anticipation at the time we took the case was that it was going to go to trial conducted by Mockler Allen & Dixon. It would have been put into a written contingency fee at that time. Whatever the recovery amount was, I would have then been paid for my services from them because I had no intention of personally conducting such a large lawsuit. I was only doing the preliminary work when I started.

HIS HONOUR: Well what about if there was no litigation?

MR. MORRIS: That's...

HIS HONOUR: What was the nature of the arrangement?

MR. MORRIS: ....that's what in fact did happen so there was never a formal agreement entered into that was binding on any of the parties because the matter got settled. Before the issue went to writ, it...it looked like it wasn't going to go anywhere and then the government became very receptive at a meeting to get rid of this matter, for whatever reason they had, and I was able to get a settlement which was not the amount envisaged at that time we took the case; it was less than that and I had an idea at the time of what my services were worth. Mr. Taylor had a different idea and made me a proposal which I accepted.

[Transcript at page 103, line 4 to page 104, line 7].

[12] With respect to the importance of the case, the Appellant said that this case was "... the biggest settlement I've ever obtained". In the course of his negotiations, the Appellant had to drive from Newcastle to Fredericton to meet Mr. Paul H. Blanchet, a lawyer with the New Brunswick Government, a little under a two-hour drive. The meeting lasted about one hour. They met twice. The letter dated October 9, 1991 confirms that the New Brunswick Government agreed to accept, as a settlement, the sum of $108,249.00 in respect of the rental claim pertaining to the Henry Street property. The claim with regard to the Pleasant Street property had been settled shortly before on the basis that Edon was to be paid $239,000.00. The releases dated October 18, 1991 relative to both claims were duly signed on behalf of both parties.

[13] The Mockler Allen & Dixon firm carried out legal research and prepared legal opinions for Edon but did not do any negotiations on its behalf. The Appellant was in touch with Mr. Patrick E. Hurley of the Mockler Allen & Dixon firm and paid the firm directly for its services. The firm of Deloitte & Touche carried out some accountancy work in respect of Edon's claim for damages against the New Brunswick Government. The bill from Deloitte & Touche was paid by the Appellant's firm on June 4, 1991. An appraisal from AES Consultants Ltd. had been requested and obtained. The Appellant's firm made the required payment on February 11, 1991 for the services provided by AES Consultants Ltd.

[14] Between 1987 and 1991, the Appellant stated that over a period of four years he spent about 34 hours working on this file. The undated bill submitted by the Appellant some time in October 1991 shows that legal fees amounted to $3,430.00 and the disbursements of $6,800.50 for a total of $10,470.67, including G.S.T. The hourly rate was in the vicinity of $100.00.

[15] The Appellant stated over and over that he had no agreement with respect to the payment of his services until the claims were finalized with the New Brunswick Government and added that at the time a cheque was received from the New Brunswick Government in settlement of Edon's claims, he received a proposal from Mr. Taylor for the payment of his services, which he accepted.

[16] The Appellant described the proposal as follows:

... the proposal was for me to not to bill on any kind of a percentage or any extra based on the amount of the settlement but to do up a bill for my disbursements, my expenses and the time I'd incurred at an hourly rate and he would personally, for it and other work I had done, see to it that I received an additional sum of money. Based on that, I had my secretary prepare a normal bill based on a non-percentage, on an hourly basis and covering our disbursements and deduct that amount from the award settlement. We received that sum; gave the balance of the sum to Mr. Taylor. Mr. Taylor in accordance with his agreement came back and gave me $20,000 in cash and as he had indicated was that this was to be tax free; that he himself would see that it was not from a company cheque, it was cash money that he would see that you know, the taxes were paid and the money was given to me tax free. At the time, I accepted that. I did not write...I did not include the money in income....

[Transcript at page 11, line 25 to page 12, line 17].

[17] The Appellant deposed that during his first meeting with the Revenue Canada auditor, Mr. Keirstead, showed him a ledger entry in the accounting records of Edon. These records indicate that a cheque in the amount of $52,000.00 had been written off and that a portion of this amount was for professional fees. Reference was made in these records to the Appellant's name. Upon being asked by Mr. Keirstead to provide explanations about these data, the Appellant suggested to Mr. Keirstead that on account of the solicitor's client privilege he should obtain the information directly from Mr. Taylor of Edon who informed the Revenue Canada auditor, according to the Appellant's deposition, that he had received $20,000.00 from Mr. Taylor.

[18] The Appellant went on to explain that Mr. Taylor gave him $20,000.00 in cash from his briefcase mostly for work done for Edon. The Appellant made clear that the amount of $20,000.00 was not included in the total amount of the bill because it would not have been in accordance with the arrangements made with his client. The proposal relating to the payment of $20,000.00 for his services came from Mr. Taylor and he accepted it. The Appellant recognized that the total amount he received for his services ($20,000.00 + $3,420.00) does not represent 15% to 20% of the amount of the total settlement received by Edon in respect of the two matters, which settlement totalled $347,249.00. The Appellant denied that he accepted a lower amount because he would not have to pay income tax on it and said this:

MR. MORRIS: No. I told you it was proposed to me to take the money that way; that they would pay the taxes on the money that I received so that I would be receiving it tax free.

[Transcript at page 163, lines 4 to 7].

[19] With respect to the contention that the $20,000.00 cash payment received by the Appellant from Mr. Taylor was a gift, the Appellant responded as follows to the questions hereinafter reproduced put by counsel for the Respondent:

MR. VÉZINA: Yes. So in that context the money you received from a client in that context, is that a gift for you?

MR. MORRIS: The money I received that was from Mr. Taylor personally, not from the company.

MR. VÉZINA: Wasn't it for your service rendered or for Edon Enterprises?

MR. MORRIS: But it was paid to me by Mr. Taylor which I assumed the tax was paid on the money for him to have it to give it to me.

[Transcript at page 167, line 17 to page 168, line 3].

[20] He added this when it was suggested that Mr. Taylor paid him in respect of services rendered to Edon:

MR. MORRIS: No. He paid it to me from himself on behalf of work I had done for him and other of his companies and that's how I interpreted it.

[Transcript at page 168, lines 20 to 23].

[21] Later on, he added the following:

MR. MORRIS: Well in the circumstances here he indicated that he was paying the taxes and he confirmed this to Mr. Keirstead that this amount of money he was to pay the taxes on and it was him who proposed this to pay the taxes on the sum of money so when he gave it to me I felt the taxes had been paid on that amount of money.

[...]

MR. VÉZINA: Can you explain to...to us, you said it was a...it was...you said Mr. Taylor agreed to pay the tax on it. Could you elaborate on that?

MR. MORRIS: He made me a proposal and the sum in addition to the hours that I had worked was to be given to me tax free. He said he would look after the tax.

HIS HONOUR: You mean he...he was going to pay the tax for you?

MR. MORRIS: He was going...the tax was to have been paid on the money so that then I received it tax free. That was my understanding at the time. Obviously I'm here, obviously I was wrong however...

[...]

MR. VÉZINA: So what you're saying is that Mr. Taylor would give you the money for the work done for Edon Enterprises but he would include that money in his own Income Tax Return – is that what you're saying?

MR. MORRIS: That was my understanding, yes.

[Transcript at page 169, lines 3 to 9,

page 170, lines 5 to 20 and page

171, lines 1 to 7].

He added further explanations later on the gift issue:

MR. VÉZINA: But isn't that what you did when you received the money and you agreed to qualify it as a gift because Edon Enterprise or Mr. Taylor would pay the tax? Isn't that what you did in fact?

MR. MORRIS: I had an interpretation of what the sum was, yes. I made my interpretation what it was.

[Transcript at page 218, lines 8 to 16].

[22] The Appellant further stated that on October 23, 1991, he deposited $347,249.00 in his trust account and transferred $10,470.00 to the bank account that he maintained for the transactions relative to the practice of his profession. He recognized that on that date he knew that he would receive more money for his services. This $20,000.00 was in fact given within a day of the Appellant's forwarding the cheque to Edon. The Appellant did not recall if he gave any receipt in respect of the $20,000.00 payment. He did not deposit that amount in his bank account. The Appellant admitted that it was possible that he went to Florida the next day. The Appellant did not recall where he put the $20,000.00 after it was placed on his desk. He does not recall how he spent the money. He never deposited the amount anywhere and he did not recall why he did not deposit it. He had a safe in his office. He testified that he spent the $20,000.00 in question. He admitted having mentioned on discovery that he probably wanted to avoid there being a record of receiving any of this cash.

[23] Reference was made to the fax dated June 28, 1991 sent by the Appellant to Mr. John Redding, an accountant working at Deloitte & Touche, with respect to the Appellant's work for Edon in relation to its claim against the New Brunswick Government. This fax reads thus:

Further to your request we have examined our records and although this action for Loss of Profits against the Government is still ongoing and our agreement on legal fees is contingent on a successful outcome we have approximated our work on the file to March, 1989 would be in the vicinity of $22,000.00 to $26,000.00.

[24] The Appellant gave his own interpretation about his own statement in the latter fax that the work done by him for Edon up to March, 1989 was estimated to be worth between $22,000.00 to $26,000.00 if computed on an hourly basis. In this connection, the following excerpt from the transcript is of some interest:

MR. MORRIS: No. That's not at all the way it should be interpreted. It says it's contingent on a successful outcome. If we had recovered two years later $200,000 and received twenty percent of...of that sum which would be $40,000 and then their accountants chose to try to say even though it was all paid at once, they chose to write it off over a number of years, they might attribute that bill, that amount at that time but that...that was their work, not mine.

MR. VÉZINA: So isn't it your understanding that their accountant were [sic] deducting the legal fees are...as they were accruing from 1987 to 1991?

MR. MORRIS: I'm not sure what they were doing at the time I did that. That was my suspicion and I rejected sending them and I received a number of calls and finally the request from Mr. Taylor, would I send something to Mr. Redding and I worded it as vague as possible to mean nothing and...and...it...it was...it was for their book work. It had no correlation to any billing out of our file, out of our work or anything but...

MR. VÉZINA: Well...

MR. MORRIS: ...the amount could very well have been accurate as I said...

MR. VÉZINA: ...well...

MR. MORRIS: ...on a successful outcome, that could have been accurate.

MR. VÉZINA: ...well if we see...if we read, "as..."...it says,

"We approximated our work on the file to March, '89...".

When you say we...we approximated, doesn't that refer to the number of hours you spent on the file?

MR. MORRIS: No. It wasn't intended to. It was...says at the beginning of the thing, Loss for Proferts [sic], it's ongoing agreement and legal fees is contingent on a successful outcome so you know, that says to me that if we were not successful then anything stated after that would not apply.

[Transcript at page 252, line 20 to page 254, line 19].

[25] He also claimed that Edon paid the bill on an hourly basis. At one point during cross-examination, the Appellant clearly asserted that the statement in the fax dated June 28, 1991 "... we have approximated our work on the file to March 1991 would be in the vicinity of $22,000 to $26,000" "did not relate to the time I had spent or estimated on that file".

[26] The Appellant added that immediately following his conversation with the Revenue Canada auditor he telephoned his accountant, Mr. Ned Fowler in Moncton and told him about the money he had received from Mr. Taylor, his accountant being unaware of this. He informed the Court that the advice he received from his accountant was that the amount in question should probably be included in his income and should have been reported at the time. He recognized that he did not consult Mr. Fowler regarding the tax treatment of the $20,000.00 before September 15, 1991. He also asked Mr. Keirstead whether the amount should be treated as a gift or income. He asserted that at the time, that is on September 15, 1994, Mr. Keirstead did not give him any definite answer. The Appellant also testified that he received from his accountant an Information Circular respecting voluntary disclosures. His understanding was that if he voluntarily made a disclosure he would not be assessed penalty. His accountant prepared such a letter upon the Appellant's instructions and a cheque in the amount determined by his accountant was immediately issued by him to Revenue Canada. He admitted that he filed an amended return in order to avoid the imposition of a penalty but added that he did not feel that he had been negligent.

[27] The Appellant also mentioned that, according to his notes, Mr. Keirstead phoned him on September 27, 1994 after having spoken to Mr. Taylor to say that he was sending a letter instructing him to include $20,000.00 in his income and that this was the end of the matter. By that time, the Appellant, according to his testimony, had already mailed the amended return and the required cheque to Revenue Canada. In this connection, it is of interest to note the following question put by Counsel for the Respondent and the Appellant's answer:

Q Is it not true that he (the auditor) never talked to you, you would have...you would not have filed an amended return?

A I don't know that. I hadn't mentioned it to my accountant and he hadn't told me, I may have.

The Appellant also stated that some time in September 1994, Mr. Keirstead called him to inform him that he was going to carry out an audit of his companies, Opera House Limited, Blue Stone Enterprises and of his own legal firm with respect to the 1992, 1993 and 1994 taxation years.

[28] Following the completion of the audit, the Appellant made reference to a proposal from Revenue Canada that with respect to the cheque of $52,000.00 that "they were going to break it down in that there was $5,000.00 to each of the company officers or directors for a total of $10,000.00. They were going to propose to allow the $20,000.00 to me as a tax deduction to the company if I acknowledged the sum". He added that "the balance of the money was going to be charged back to the company under undisclosed or unknown of where the money went". Subsequently, the Appellant was reassessed and an amount of $42,680.00 was added to his income and a penalty was levied.

[29] On behalf of the Respondent, two witnesses were produced, Mr. John Redding and Mr. Robert Taylor.

[30] Mr. John Redding has been a certified management accountant since September 1988. At the relevant times, he worked for Deloitte & Touche and left employment with this firm in September 1997.

[31] Mr. Redding prepared Edon's financial statements for the taxation years beginning approximately in 1988 through 1992 with the assistance from junior personnel in the firm. He indicated that Edon had two lines of businesses namely construction of buildings and rental income. He characterized it as a small business firm. That firm did not have a bookkeeper on staff. Mr. Redding stated that he did not carry out an audit nor did he perform a review of the financial statements. In his testimony, Mr. Redding referred to a working paper dated July 12, 1989 prepared initially by his assistant and commented on the entry reading as follows:

legal accrual re breach of contract on Anderson Delnio land per Don; legal work through year-end.

[Transcript at page 279, lines 16

to 19].

[32] He mentioned that this entry represented "an estimate of legal fees payable as a result of pursuing this breach of contract action based on information" that Mr. Taylor provided to him. He also mentioned that in the Statement of Income and Retained Earnings for the year ended March 31, 1989 the line reading "professional fees" opposite the amount of $32,010.00 "would include the $25,000 legal accrual" referred to in the working paper mentioned to in the preceding paragraph.

[33] Mr. Redding also commented on an entry opposite $40,000.00 on a working paper for Edon's 1990 taxation year relating to the same matter as that mentioned in the working paper referred to in the preceding paragraph and confirmed that the entry has to do with "an accrual for legal fees" accompanied by a check mark defined in a footnote as follows: "per discussion with client". The amount of $40,000.00, according to Mr. Redding, being $15,000.00 higher than the amount mentioned in respect of the previous year indicates that "additional time was spent of a legal nature during that year and that much was owing at the end of this particular year". In the same working paper, there is another entry pertaining to legal services which refers to services provided by the firm of Mockler Allen & Dixon in connection with the Henry Street property. Similar explanations were given by Mr. Redding about the entry relating to legal fees for the year ended March 31, 1991 where the amount indicated is $43,000.00 as opposed to the amount of $40,000.00 recorded for the previous year.

[34] Mr. Redding gave the following explanations respecting the entry showing an amount of $42,680.00 in Edon's "General Ledger Listing as of March 31, 1992":

MR. VÉZINA: ...could you explain the origin of the amount under professional fees of $42,680?

MR. REDDING: That amount is a result of a cheque being paid through the Central Trust bank account. The amount of the cheque was 52,680 in total. The cheque is made out to cash. It is dated October 23rd, 1991 and...

...

MR. REDDING: Yes. Since the cheque is made out to cash and there is no other indication on the cheque of what it might be paying, I would need to ask someone what it was for. I'm looking at my notes here and they say that I had a discussion with Don Taylor and that he indicated that the cheque was comprised of the following amounts, $5,000 being a management fee for himself, Don Taylor; $5,000 being a management fee for Ned McKibbon and the balance being $42,680 cash to David Morris in consideration of remaining legal fees re action against province.

[Transcript at page 297, lines 12 to 19 and page 298, line 19 to page 299, line 4].

[35] Reference was also made to Edon's bank statement with Central Guaranty Trust Company for the period ending October 31, 1991 and in particular to the entry involving a cheque in the amount of $52,680.00 whereupon Mr. Redding commented as follows:

MR. REDDING: This is a...a bank statement with Central Guaranty Trust. Yes, I have seen this because my handwriting is on it and it...it has the same notations that I just described, Don, $5,000; Ned, same amount; David Morris, 42 680 with a bracket and an arrow pointing to the 52 680.

MR. VÉZINA: So what's understanding of what happened from this sheet there?

MR. REDDING: My understanding is that there was a payment of cash made to those individuals in those amounts with...from a...and the cash coming from a cheque that was drawn on the Central Trust bank account.

MR. VÉZINA: And that's the same...the...October 23rd, '91, the same day an amount of $336,778 and $33 [sic] was deposited in the account? Is that correct?

MR. REDDING: Yes.

[Transcript at page 299, line 24 to page 300, line 17].

[36] Mr. Redding confirmed that his understanding, from the relevant financial data referred to above, is that the Appellant received, in October 1991, $42,680.00 to which should be added the amount of $10,470.00 (covering fees and disbursements) to determine the total amount received by the Appellant from Edon for the 1991 taxation year.

[37] The deposition of Mr. Donald Taylor was of interest particularly in respect of the distribution of the proceeds of the cheque in the amount of $52,680.00. He described himself as a building contractor. Mr. Taylor was vice-president of Edon and looked after the payroll, the making of payments to suppliers, etc. He owned 37% of the shares of the capital stock of Edon, the same percentage of shares as Mr. Edward McKibbon and their respective wives owned each 13% of the shares of that firm which had been incorporated in 1976. Edon was in the leasing business; in addition, it was also involved in lumbering and construction work. Edon employed half a dozen persons.

[38] Mr. Taylor confirmed that when he retained the Appellant's services, they did not discuss fees but such payment of fees was contingent on the outcome of the lawsuit. Mr. Taylor said that he could not recall the exact amount that he paid to the Appellant but he recognized his signature on the cheque of $52,680.00 and he had it cashed. He then explained that he paid Mr. McKibbon and himself $5,000.00 each and that the rest went to the Appellant. He added that this was the fee that was agreed upon with the Appellant. He did not remember if there was any discussion about how this amount of $42,680.00 was to be taxed. With respect to the undated bill to Edon issued by the Appellant, he recalled very little. He mentioned that he gave two cheques to the Appellant and the latter gave him back one cheque.

Appellant's submissions

[39] The Appellant first contended that there are circumstances where monies received by a solicitor is a gift and suggested that the monies that he received were a gift. In this connection, he referred to the case E. Winemaker v. Canada, [1995] 2 C.T.C. 2992 and 96 DTC 6040. He added that in any event, in the circumstances surrounding the receipt of those monies, there could not be any question of gross negligence on his part for not including the monies in question in his income.

[40] Next, he put forward the proposition that there was voluntary disclosure on his part and he relied on the Information Circular dealing with voluntary disclosures. He suggested that the evidence is uncontradicted that he took the required steps. He also argued that even if the Court was not bound by the relevant Information Circular, his course of conduct and his spirit of cooperation should be considered as factors bearing on the issue of penalty.

[41] The Appellant maintained in his summation the proposition that the only amount he received from Mr. Taylor was $20,000.00 and not $42,680.00, as assumed by the Minister. He suggested that his evidence in this regard was not refuted.

Respondent's submission

[42] With respect to the contention that the moneys received by the Appellant were a gift, Counsel for the Respondent simply stated that when you are remunerated for work there cannot be a gift because there is consideration. He referred to Black's Law Dictionary and to the decisions in Hudson Bay Mining and Smelting Co. v. The Queen, [1986] 1 C.T.C. 484 and [1989] 2 C.T.C. 309 and Winemaker v. Canada, [1995] 2 C.T.C. 2992, [1996] E.T.C. 2007.

[43] With respect to the question as to the quantum of money received by the Appellant from Mr. Taylor, Counsel for the Respondent argued that it is very unlikely that the Appellant received only $20,000.00 for his work for Edon but it is more likely that he received $42,680.00.

[44] In support of this proposition, Counsel for the Respondent stressed that there are no plausible explanations as to why he did not receive at least 15% of the total amount of the settlement since, according to his own evidence, this percentage was the minimum he charged for his services when paid on a contingency basis. He also relied on the evidence given by Mr. Taylor regarding the cashing of the $52,680.00 cheque and the subsequent distribution of its proceeds.

[45] He also found support for his position on the documentary evidence as to the value of the Appellant's work in the accounting data of Edon and in the evidence given by Mr. Redding. He also relied on the lack of explanations on the Appellant's part as to what he did with the money that he admits he has received.

[46] On the penalty issue, the Appellant relied on the W.S. Morgan v. Canada decision, [1995] 2 C.T.C. 2635 and the L Venne v The Queen, [1984] C.T.C. 223. The fact he did not leave a paper trail is significant for tax purposes. The fact that the day following his discussion with Mr. Keirstead, the Appellant decided to report it and amend his income tax return is noteworthy. He knew that he had been caught. Also, the Appellant did not discuss with his accountant the tax treatment of the $20,000.00 at the time he made his return of income.

Analysis

[47] First of all, it appears to be appropriate to determine if the amount received by the Appellant in October 1991, whether that amount be $20,000.00, as contended by the Appellant, or $42,680.00 as assumed by the Minister of National Revenue upon reassessing, is to be included in the Appellant's income.

[48] The evidence is clear that the amount the Appellant had received from Mr. Taylor represented payment in respect of his legal work done for Edon and possibly for services performed for some other firm in which Mr. Taylor had a substantial interest. Unquestionably, the amount received by the Appellant represented consideration for his services rendered as a solicitor. Also, as soon as the Revenue Canada auditor brought to the Appellant's attention the failure to include this amount in his income, the Appellant amended his tax return, after consulting his accountant, to include in his return the amount of $20,000.00 that he claimed he had received from Mr. Taylor. In the course of his argument, the Appellant did not advance with much vigour the proposition that the amount remitted to him by Mr. Taylor was a gift although he made reference to the Winemaker case mentioned earlier.

[49] Having concluded that the amount received by the Appellant should have been included by the Appellant in his income for the 1991 taxation year, the next question is whether the Minister of National Revenue is entitled to assess penalty in respect of the failure to include the amount received by the Appellant pursuant to subsection 163(2) of the Income Tax Act.

[50] In my view, the Appellant was guilty of gross negligence in not including in his income the amount received from Mr. Taylor. The Appellant was, at that relevant time, a lawyer of about 15 years of experience and a seasoned businessman with varied interests. He obviously knew that the amount he received from Mr. Taylor was in payment for his services as a solicitor to a large extent if not exclusively for Edon. It is clear that this payment could not be considered as a gift. The Appellant recognized that when he was first retained by Mr. Taylor in 1987, he was to be paid for his work for Edon on a contingency basis. His explanation that Mr. Taylor was to pay the income tax in respect of the amount handed over to the Appellant is simply not credible. Among other considerations, Mr. Taylor never referred to such an arrangement.

[51] I am fortified in this conclusion by the fact that when it was brought to his attention by Mr. Keirstead that he received a certain amount from Mr. Taylor, he did not hesitate to take the proper action and to instruct his accountant to amend his income tax return for the 1991 taxation year and to forward the required cheque to Revenue Canada. I agree with Counsel for the Respondent that he had been caught by Revenue Canada and attempted to avoid the imposition of penalty at that point, relying on the relevant Information Circular. The fact that he amended his tax return cannot preclude the Minister of National Revenue from assessing penalty in respect of the omission to include the amount in question in his original return.

[52] I find that the burden of proof imposed on the Minister of National Revenue by subsection 163(3) of the Income Tax Act has been discharged.

[53] The question that remains to be determined pertains to the quantum of the amount received by the Appellant from Mr. Taylor in October 1991.

[54] The evidence given by Mr. Redding, a straightforward and credible witness who at the relevant time was responsible for the accounting work required to be done by Edon, suggests that it is likely that the Appellant had received $42,680.00 rather than $20,000.00.

[55] First, the value of the work done by the Appellant estimated by Edon is in the vicinity of the amount of $42,680.00. It would be surprising that Edon would have paid $20,000.00 for the Appellant's work while it agreed to indicate in its accounting books for its 1991 taxation year an amount of $43,000.00 as representing the accrued liability incurred by Edon in respect of the Appellant's legal services.

[56] The complexity of the work, the number of steps taken by the Appellant over a period of four years, the successful outcome of the negotiations, the substantial amount of money that was paid to Edon by the New Brunswick Government, all these factors do not lead me to believe that Mr. Taylor would have paid in the circumstances for the Appellant's services only the amount of $20,000.00 in addition to the amount of $3,430.00 referred to in the Appellant's undated bill to Edon.

[57] Also, the testimony of Mr. Taylor strongly suggests that the latter paid to the Appellant $42,680.00 rather than $20,000.00. While it is true that Mr. Taylor may have interest in the matter, his credibility has not been really questioned by the Appellant.

[58] Even if I had before me the sole evidence of the Appellant respecting the amount of money that he is likely to have received from Mr. Taylor in October 1991, I would be inclined to the view that it is improbable that the Appellant has only received $20,000.00 on account of the following considerations:

1. The receipt of $20,000.00 is not consonant with the Appellant's evidence to the effect that the minimum fee he would charge for his services where he was retained on a contingency basis was 15%. The sum of $20,000.00 (even if the amount of $3,430.00 is added to $20,000.00) would represent much less than 10% of the total amount of the settlement.

2. The absence of paper trail regarding the amount received by the Appellant militates against the acceptance of his statement that he received only $20,000.00 from Mr. Taylor.

3. Having regard, inter alia, to the successful outcome of the Appellant's negotiations with the representatives of New Brunswick Government's and the total amount of the settlement being $347,249.00, I do not see why the Appellant would not have received an amount which would be close to 15% of the amount of the settlement. Also, the amount of $42,680.00 happens to be close to the estimate made by Edon in its books as to the value of the Appellant's services.

4. My finding that the Appellant's testimony in many areas was not credible notably that the income tax payable by him was to be paid by Mr. Taylor and his lack of explanations about the use of the amount of money received from Mr. Taylor in October 1991.

[59] Having regard to Mr. Redding's evidence, Mr. Taylor's testimony and the Appellant's deposition, I therefore find that the Appellant did not discharge the onus imposed on him that he did not receive $42,680.00 from Mr. Taylor in October 1991.

[60] On the whole, I am therefore of the opinion that the Minister of National Revenue was right in including in the Appellant's income for the 1991 taxation year the sum of $42,680.00. The assessment of penalty is confirmed as well.

[61] For these reasons, the appeal is dismissed with costs.

Signed at Ottawa, Canada, this 6th day of April 1999.

"Alban Garon"

A.C.J.T.C.C.