Miucci v. Minister of National Revenue, [1996] 1 CTC 2431, 96 DTC 1039

P.R. Dussault J.T.C.C.:— These are appeals from assessments for the appellant’s 1984 to 1987 taxation years.

The appellant was, for the years under appeal, the major shareholder and president of Les Vins Corelli Wines Inc. (“Corelli”). Corelli’s business was the importation of grape juice and wine, production of wine and marketing of both, juice and wine.

In 1987, a series of events caused the demise of Corelli. In June 1987, two shipments of wine were confiscated by Revenue Canada, Customs and Excise, as they had been described on bills of lading as being shipments of grape must. During the conflict that ensued, the Soci t des alcools du Qubec (“SAQ”), the exclusive purchaser of wine in Quebec, decided to cease doing business with Corelli as of August 3, 1988. A lawsuit was later introduced by Mr. and Mrs. Miucci against the SAQ and its president, and is still pending.

In October 1988 and February 1989, the Minister of National Revenue (Customs and Excise) issued notices of ascertained forfeiture against Corelli and the appellant personally. These notices were issued with respect to a certain number of other shipments of wine from Italy and Spain that would have been described as grape juice.

The Régis des permis d’alcool du Qubec (the “Régis”) then held hearings in order to determine whether Corelli had complied with the conditions of its wine maker’s permit. On March 7, 1989, after 12 days of hearing, the Régis decided to revoke Corelli’s permit as of that date and confiscated all alcoholic beverages on Corelli’s premises. According to the appellant, that decision was appealed. On March 17, 1989, Corelli filed for bankruptcy.

Issues

On January 12 and 13, 1989, the Minister of National Revenue (the “Minister”) reassessed Mr. Miucci for his 1984 to 1987 taxation years on a net worth basis. The net worth calculation includes assets held by both the appellant and Mrs. Miucci. The appellant’s income for every year in issue was increased by an amount of allegedly unreported income. According to the respondent, the main source of this unreported income would have consisted of proceeds from unreported sales of wine by Corelli and other income of Corelli over which the appellant had control.

The income reported by the appellant for the years in issue was the following:

1984: $26,859

1985: $33,943

1986: $35,854

1987: $35,487

The income reported by Mrs. Miucci, the appellant’s wife, was:

1984: $291

1985: $10,000

1986: $22,700

1987: $14,736

Notices of objection were filed by the appellant. Subsequently, on October 23, 1990, second net worth assessments were issued whereby the amount of unreported income was decreased for 1984 but increased for every other year in issue.

In the reply to the notice of appeal, the respondent states that $454,601 of income was not reported by the appellant as follows:

1984: $17,530

1985: $277,757

1986: $106,481

1987: $52,833

The respondent also takes the position that the appellant had omitted to report those amounts knowingly or under circumstances amounting to gross negligence. A penalty of 25 per cent was thus assessed pursuant to subsection 163(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the “Act”) for each year in issue including 1984. For the moment it is sufficient to note that the 1984 taxation year would have normally been statute- barred.

The appellant claims that the assessments are grossly exaggerated in that the Minister has failed to include important liabilities in his net worth calculation, that business expenses were wrongly considered personal expenses and, finally, that some personal expenses were over-estimated.

More specifically, in his notice of appeal and the attached document, the appellant claims that the unreported income for the years in issue was over-estimated by $433,811 thus admitting that at least some income was not reported. The net worth calculation made by the respondent is challenged with respect to specific elements as follows:

1. $300,000 Loan payable

The appellant initially submitted that for 1985 and 1986 the Minister had failed to take into account the money which he borrowed from Guido Roberto Ascoli. The amounts borrowed would have been $225,000 in 1985 and $75,000 in 1986, for a total of $300,000. It was claimed that these amounts had not been repaid during the years in question. However, as we shall see, the appellant’s position is that the $300,000 loan was made in 1985 and was used to purchase Corelli shares then held by a certain Gabriele Mancini. The shares were purchased in 1985 for $225,000 and in 1986 for $75,000.

2. $90,000 Loan receivable

The appellant submits that, in 1981, he lent $90,000 to his brother-in- law, Leonardo Palumbo, who was in Italy, and that such loan was repaid as follows:

1984: $7,000

1985: $45,000

1986: $18,000

1987: $20,000

The appellant claims that the Minister never took that source of funds into account.

3. Automobile

According to the appellant, the purchase price, net of a trade-in, for a 1986 Jaguar automobile bought in 1985 was $30,000 and not $35,525 as alleged by the Minister.

4. Travel expenses

The challenge with respect to travel expenses is for the years 1984, 1985 and 1986. Basically, the appellant claims that most of the trips were for business purposes or that the personal element assessed is too high. The appellant claims a total reduction of $22,000 for the three years.

5. Miscellaneous expenses

Personal expenses for professional fees, car expenses, expenses with respect to the operation of a 50 cc. “moped” and for hair care were also initially challenged by the appellant. As the amounts challenged are very small and as only some of these expenses have been touched upon in evidence, I will deal with the details later on.

The appellant also stated that he had planned to diversify Corelli’s business and set up a small brewery. According to him, this was a company project and the expenses in relation thereto should not have been considered personal expenses. The reduction in personal expenses claimed is $95 for 1984 and $1,007.50 for 1987.

6. Reassessment for the 1984 taxation year

Although this issue was not initially raised in the notice of appeal, the reassessment of the 1984 taxation year is also being challenged by the appellant’s counsel.

7. Penalties

The penalties assessed for the 1984 to 1987 taxation years are also contested.

8. Carry-back of allowable business investment loss of 1988

Although the 1988 taxation year is not under appeal, the appellant’s counsel raised the question of the appropriate carry-back of that loss to the three preceding years. The respondent has not acted upon this pending the decision of this court concerning the 1985, 1986 and 1987 taxation years.

Preliminary remarks

At this stage, it should be pointed out that the Minister has included assets which are in the name of Mrs. Miucci to the appellant’s net worth. This fact could have been important with respect to the Corelli shares allegedly bought by the appellant in 1985 and 1986 with the proceeds of the $300,000 loan referred to above and transferred to Mrs. Miucci’s name. However, this point was never challenged by the appellant who testified that he had personally borrowed and bought the shares which were put in his wife’s name. Moreover, in his 1988 tax return, the appellant claimed an allowable business investment loss with respect to both, his own shares in Corelli and those registered in Mrs. Miucci’s name.

The respondent’s position is that Mrs. Miucci did not actively take part in Corelli’s affairs and that the funds used to purchase the Corelli shares came from income which was not reported by the company and over which the appellant had personal control.

Either way, I think it is pretty clear, as will appear later, that Mrs. Miucci never took part as a principal in any transaction alleged to have taken place, that she was never involved in any of Corelli’s operation and that it is the appellant himself who controlled the funds used in the various transactions.

The evidence adduced in this case is fairly lengthy with respect to testimonies heard, to documents submitted as well as to written representations. On the one hand, I do not plan to review in minute detail all of the evidence, especially since a great portion of it concerns the problems Corelli faced over the years with different authorities and public bodies. On the other hand, some transactions, which are not directly related to the items challenged by the appellant, will be referred to. In my opinion, these transactions bear a great deal on the issue of credibility which is at the heart of a case of this type. Needless to say that the appellant has, as in any other tax case, the burden of proving on the balance of probabilities that the assessments are ill-founded. It is of course the respondent’s duty to demonstrate, in like manner, that he had the right to reassess for the 1984 taxation year and, subject to some qualifications, to impose penalties for the four years in issue.

Before analyzing the various points challenged by the appellant, I will address the issue of credibility in a more general way. It is very difficult to give much weight to the mere assertions of a witness which are often very vague, imprecise and unsubstantiated in any manner. It is even more difficult when contradictions and inconsistencies are added to vagueness and confusion. Furthermore, when a taxpayer readily admits that officially recorded transactions do not represent the true rights and obligations of the parties, and especially when that occurs with respect to more than one transaction, it becomes very difficult to believe that another transaction, presenting itself some inconsistencies, is to be regarded as representing the truth and is not, like the others, to be considered a mere sham and be totally disregarded. The evidence in the present case offers more than is needed to make this point.

A first example concerns the sale of the family residence by the appellant to his daughter, Anna Maria, on October 28, 1988, at a time when Corelli was encountering problems with different authorities. The contract, an authentic notarial deed, states that the sale was for an amount of $200,000 which the vendor acknowledged having received from the purchaser. In their testimony, the appellant [1] and his daughter [2] both stated that the sale never took place, that it was a gift and that no money was ever paid by Miss Miucci or received by the appellant. The appellant claims that he does not know why such a price was stipulated in the contract and that it was probably the notary’s decision. Such an explanation is simply not credible or acceptable.

Another example concerns the 1981 sale of two condominiums by the appellant in Italy. The appellant referred to this sale as being the source of the $90,000 he allegedly lent to his brother-in-law, Leonardo Palumbo, in the course of 1981. The appellant stated that, at the time, he was the owner of three small condominiums in Italy and that two of them were sold to Italian citizens for a price of 20 or 22 million liras each, although the price recorded in the contract was only 18 million liras each. Tax saving in Italy was advanced as the reason for not mentioning the real price in the contracts. The appellant even tried to minimize the importance of that fact by saying that it was more or less customary to proceed in such a fashion in Italy and that it is even done here. [3] I do not entertain the slightest doubt that it is done, but will only comment that it is nevertheless fraudulent. There are other inconsistencies in these transactions with regards to it being the possible source of funds for the $90,000 loan to which I will refer later.

Yet, another example of records not coinciding with reality is in respect of the Corelli shares which were initially issued to a certain Walter Perry and later transferred to Mrs. Miucci. Although the records would indicate that some 8,500 shares would have been issued for $10 each, the appellant asserts that there was never any money paid by Mr. Perry upon the issuance of the shares or to him upon the subsequent transfer to Mrs. Miucci. [4]

I will finally refer to a series of four contracts [5] submitted as representing the transactions whereby the appellant would have bought the Corelli shares then held by a certain Gabriele Mancini, which shares were then registered into Mrs. Miucci’s name. The appellant explained that, due to an understanding with Corelli’s banker, it was impossible for Corelli to increase its liabilities or to reduce its capital in order to buy back Mr. Mancini’s shares. The solution, as he explained, was to find and personally borrow the $300,000 needed to do so. However, in each of the four contracts, Corelli, and not the appellant, is named as the purchaser of Mr. Mancini’s shares. As we shall see later, even the agreement or contract whereby he would have personally borrowed the $300,000 refers to a direct investment in Corelli and not a loan to the appellant.

This last example might not be viewed as of the same nature as the preceding examples in light of the appellant’s explanation. Nonetheless, it certainly indicates a way of carrying transactions not in accordance with what is presented in legal documents that are supposed to reflect the true rights and obligations of the parties to the transactions.

The first three transactions tend to demonstrate a modus operandi that is not righteous and honest, to say the least. They also tend to create and, as they multiply, widen a credibility gap that bears heavily upon the conclusions to be reached in this case.

It is with this in mind that I will now proceed to analyze the various claims of the appellant with respect to the assessments made by the respondent.

Analysis

1. $300,000 Loan payable

The net worth statement, as prepared by the Minister, included $225,000 in assets for 1985 and $75,000 for 1986. These amounts represent the cost of Corelli shares purchased from Mr. Mancini and registered in Mrs. Miucci’s name in the course of those years.

The appellant submitted that the Minister erred in the assessment by failing to take into account the loan incurred to purchase the shares. As mentioned earlier, the annex attached to the appellant’s notice of appeal indicates that Guido Roberto Ascoli would have loaned the appellant $225,000 in 1985 and $75,000 in 1986 for a total of $300,000. These amounts would not have been repaid during the years in question.

In his testimony, the appellant stated that Gabriele Mancini, a shareholder of Corelli, had an agreement with Corelli pursuant to which Corelli was to purchase Mr. Mancini’s shares for a price of $300,000. However, according to a banking agreement between Corelli and the Banque Nationale du Canada in August 1984, Corelli could not increase its liability by borrowing to repurchase these shares. This was confirmed by Mr. Yves Prigny, then the account manager for the Banque Nationale du Canada and in charge of Corelli’s account. The appellant stated that because of this, he had no choice but to borrow the money personally in order to purchase the shares.

The appellant then testified that in June or July 1985 he approached Mr. Ascoli, a lawyer from Ancona, Italy, whom he had known for a certain number of years, for the purpose of finding an investor. Mr. Ascoli found one over a very short period of time. This investor, who would not reveal his identity, would have agreed to lend $300,000 to the appellant at an interest rate of 15 per cent. According to the appellant, a loan agreement was signed on August 10, 1985, in Lugano, Switzerland, with his wife, Filoména Palumbo-Miucci, representing the unknown investor. At the time of signing, Mr. Ascoli would have remitted the appellant the sum of $150,000 cash in $50 and $100 Canadian dollar bills. The appellant testified that he brought the money back to Canada in a “valise” but did not deposit it in any bank; rather, he would have kept it at home for some time for his “own personal reasons” which were never explained. He suggested that he might have used part of the money to buy a Jaguar around the same time. According to him, part of this cash money, along with a $40,000 bank draft from Forexco, a Montréal foreign currency exchange company, was eventually remitted directly to Mr. Mancini in payment for the shares. The remaining $150,000 of the loan proceeds was transferred by bank draft to Mrs. Miucci’s account at the Royal Bank of Canada in Montreal on August 21, 1985. An equivalent amount would have been paid directly to Mr. Mancini from ‘Mrs. Miucci’s account. All the shares bought from Mr. Mancini, for a total purchase price of $300,000, were eventually transferred in Mrs. Miucci’s name.

Exhibit A-6 contains four different contracts concerning the purchase, by Corelli and not by the appellant as previously stated, of Mr. Mancini’s shares in Corelli. The contracts are dated June 4, 1985, December 20, 1985, January 13, 1986 and May 16, 1986. Pursuant to the first contract, 2,941 common shares were sold and the purchaser was granted an option to purchase the remaining 2,941 shares still held by Mr. Mancini. This option was partially exercised on separate occasions as evidenced by the three following contracts. Asked as to why he did not exercise the option as soon as he had the necessary funds, namely the $300,000, the appellant simply stated that he was not obliged to do so and pay right away so that there was no real reason why he should have done it immediately. I will simply comment here that such an attitude seems strange when one, instead of depositing cash money in the bank prefers to simply keep it at home for several months.

The agreement signed in Lugano, a private writing in Italian, was submitted in evidence along with an official English translation. The terms of the agreement amount to an investment in Corelli more than a loan to the appellant personally. Filomena Palumbo-Miucci is named as the investor’s representative and the Corelli shares were to be issued and registered in her name in guarantee of payment of principal and interest. The agreement states that the first instalment of $150,000 was to be paid by August 1985 and the second instalment by December 31, 1987.

Mr. Guido Ascoli was also called as a witness. He testified that he had drawn up the agreement, a private writing, whereby his client agreed to invest $300,000 in Corelli at 15 per cent interest. Mr. Ascoli stated that although he was not usually involved in this type of transaction, he had found the investor very rapidly. Since the appellant had a good reputation in Italy, the investor, who was found in less than a month, did not even request to look at Corelli’s books. As stated in the contract, the investor had requested to remain anonymous. For this reason, Mr. Ascoli refused to give his name claiming that it was privileged information. I disposed of an objection from counsel for the respondent on that basis. Moreover, according to Mr. Ascoli, the investor was represented by Mrs. Miucci for the purpose of the agreement because he did not want him to be involved in “daily details”. Although there was some confusion in his testimony as to when the transfer of money actually occurred, Mr. Ascoli finally said that he had paid the appellant $150,000 cash at the time of signing the contract. He did not recall whether any receipt had been issued. When asked as to why there was no mention of that first $150,000 payment in the contract, Mr. Ascoli testified that the appellant had asked to modify the terms of the contract and that the investor then decided to pay the first amount immediately. Nevertheless, the contract was not altered to reflect this change. I will only comment here that this is yet another example in which the contract does not conform with reality.

Mr. Ascoli also testified that his client informed him that the second $150,000 was transferred a few days later by way of a bank transaction. Mr. Ascoli, however, did not have any direct knowledge of this transaction.

Mr. Ascoli further testified that he had demanded interest payments from the appellant several times, beginning in August 1986. Although some demands would have been made in writing, Mr. Ascoli said that he had not brought copies of any of these letters with him. Some letters would also have been written by the appellant. Moreover, according to Mr. Ascoli, the appellant would have guaranteed the payment in writing in 1989. No document could be presented to support these statements. A direct reference to answers given in cross-examination is useful here as it also bears on the credibility of that witness:

Q. Je vais reprendre ma question. Je ne vous parle pas de quatre-vingt-neuf (89). Est-ce que le paiement d’intérêt a été réclamé en mil neuf cent quatre- vingt-six (1986)?

A. Oui.

Q. Est-ce que vous avez vos lettres à ce sujet-la?

A. Pas ici.

Q. Est-ce que les intérêts ont été réclamés en mil neuf cent quatre-vingt-sept (1987)?

A. Les intérêts ont été demandés plusieurs fois dans ces années, même par téléphone.

Q. Est-ce qu’ils on été demandés par écrit ou par téléphone?

A. Surtout par téléphone, il me semble qu’il y a aussi quelques lettres de sollicitation.

Q. Est-ce que monsieur Miucci a garanti l’emprunt par écrit? Est-ce que par crit il l’a garanti, par écrit?

A. Monsieur Miucci m’avait dit plusieurs fois à ce moment-là qu’il avait prvu dans une manire quelconque dans un trs bref dlai. En crit, il m’a garanti seulement en mil neuf cent quatre-vingt-neuf (1989) par écrit, après la rencontre qu’on a eue en Italie.

Q. Est-ce que les intérêts ont été réclamés en mil neuf cent quatre-vingt-huit (1988)?

A. Je dis que plusieurs fois dans cette période j’ai demandé, maintenant je ne me rappelle pas avec exactitude les dates. [6]

Furthermore, Mr. Ascoli testified that no action was ever taken against the appellant because they, Mr. Ascoli and the unknown investor, had confidence in him even though the principal and interest had never been remitted and paid.

In my view, this evidence is not sufficient to prove, on a balance of probabilities, that the $300,000 loan was in fact made by a third party. It merely establishes that an investment agreement was signed on August 10, 1985, on behalf of an unknown investor. There was, however, no document presented to establish that there was a real transfer of $150,000 cash in Canadian currency from a third party to the appellant. There has been no receipt nor any other document introduced as evidence of that transfer. One need not be hard pressed to conclude that the mysterious investor might well have been the appellant himself.

There is evidence by way of a copy of a bank transfer note (Exhibit A- 3) that $150,000 was wired from Switzerland to Mrs. Miucci’s account at the Royal Bank of Canada in Montréal on August 21, 1985 by an unknown client. There was no evidence, however, to establish that this money came from a third party. Again, the money might have been obtained from the appellant’s or Mrs. Miucci’s own funds. It is also strange that neither the appellant nor Mr. Ascoli could produce any written demands for payment of interest, as those demands were allegedly made on more than one occasion and documents would have existed in that respect. If one is to come from Italy to testify in Montréal, on a specific subject matter, it would normally be expected that all pertinent documents would be brought along if they at all exist. Furthermore, if a genuine loan was in fact made by a third party, no explanation was ever given as to why no interest at all would have been paid particularly in either 1986 or 1987 as Corelli’s business was still going well and the appellant could, more particularly in the summer of 1986, travel extensively, for more than seven weeks, to Europe with his family.

I would like to add a final comment regarding this issue. The agreement stated that the appellant would undertake to award Corelli shares equal to the amount invested. We know that the Corelli shares, held by Mr. Mancini, were directly transferred from him to Mrs. Miucci. However, there would have been no indication in Corelli’s books, that these shares were being held in trust for some unidentified investor. The whole issue is even more puzzling when the appellant himself claimed an allowable business investment loss on 100 per cent of the issued shares of Corelli in his 1988 tax return and that no money, in capital or interest, has ever been repaid to anyone.

2. $90,000 Loan receivable

The appellant claimed that, in 1981, he lent $90,000 to his brother-in- law in Italy and that the Minister has failed to take into account the repayment of this loan in his net worth assessment. He submitted that he received $7,000 in 1984, $45,000 in 1985, $18,000 in 1986 and $20,000 in 1987.

The alleged source of the loaned funds is from the sale of two condominiums in Italy owned by the appellant and sold in 1981. The appellant’s testimony regarding the amount which he received from the disposition of those condominiums is so convoluted that the actual amount received, that would have been loaned, is even difficult to figure out. He stated that although the price at which he sold them for was stipulated in the contracts to be for 18 million liras each, the actual amount received was either 20 or 22 million liras each. He therefore stated that both condos fetched a total amount of 60 or 64 million liras, the equivalent of $90,000, counting 600 liras to the dollar. Simple arithmetic indicates that 44 million, and not 64 million, would have been received. At 600 liras to the dollar, the equivalent, in Canadian dollars, is $73,333 and not $90,000. Needless to say there is no evidence to account for the discrepancy.

It is alleged that the loan was made as if it was from Mrs. Miucci to her own brother, Mr. Leonardo Palumbo. According to the appellant, this loan in Italian liras was recognized to equal $90,000 and would be reimbursed in an equivalent amount. The loan agreement was never in writing although the appellant stated that an interest rate of 10 per cent was agreed upon. The appellant failed to call the parties to the transaction as witnesses; neither Mrs. Miucci nor Mr. Leonardo Palumbo testified during the hearing. Rather, Giovanni Palumbo, brother of Mrs. Miucci and of Leonardo Palumbo, came from Italy to testify that he had personal knowledge of certain aspects of the transaction. The only explanation advanced as to why Leonardo Palumbo himself did not make the trip was that he had personal problems in Italy.

Mr. Giovanni Palumbo testified that he witnessed the counting of an amount of 60 million liras at his mother’s house in Italy in 1981. He stated that he believed interest was payable at the rate of 10 per cent. He further stated that his brother Leonardo told him the loan was repaid in cash, without knowing exactly how and when. He added that it was probably in 1987 or 1988.

The appellant, on the other hand, testified that the loan was repaid in several instalments starting in 1984. According to him, an amount of $7,000 reimbursed in 1984 was entirely spent in Italy where it was received. A second instalment of $45,000 reimbursed in Italian liras in 1985 would have been brought back to Canada and exchanged into Canadian dollars and spent here. Again no document was submitted with respect to any foreign currency transaction that would have occurred. The remaining amount owing would have been repaid in 1986 and 1987.

No explanation was really given as to how and when.

What has happened to the $45,000 brought back to Canada in 1985 is furthermore unclear. The appellant stated that he may have used part of the amount to pay for a new Jaguar automobile. It must be remembered however that, earlier in his testimony, he had stated that the Jaguar might have been purchased with a portion of the $300,000 loan he had received through Mr. Ascoli.

As for the interest, the appellant stated that he “was paid some interest” but admitted that he had never kept any record with respect to that transaction. At any rate, the respondent, in his written pleadings, pointed out that from 1984 to 1987, a total of $343.53 in interest from bank deposits was reported by the appellant for 1986 and 1987. Mrs. Miucci reported only $291.28 in 1984.

Once more, it must be determined if a $90,000 loan repayment was established on a balance of probabilities. Again, I have to conclude that the appellant failed to meet that test. The general credibility gap, to which I referred to earlier, coupled with the many inconsistencies in the appellant’s testimony as well as the absence of any other credible and acceptable evidence by way of testimony of other parties privy to the transaction or by way of documentation of any nature whatsoever, lead me to the very simple conclusion that I cannot accept the appellant’s claim.

3. Automobile

A 1986 Jaguar Sovereign was bought in 1985. The appellant submitted that the purchase price, net of a trade-in, was $30,000. The assessment made by the respondent is on the basis that the net purchase price was $35,525.

The appellant testified that he purchased the Jaguar for $42,000 with his 1982 Buick Riviera as a trade-in. A value of $12,000 was credited for that car. He stated that he paid the balance of $30,000 in full in October 1985, although he could not remember what means of payment he used, cash or cheque.

The appellant called as a witness Hector Sigouin, Regional Manager for Jaguar Canada. Mr. Sigouin testified that the suggested retail value of a 1986 Jaguar was $45,775, although it was normal for dealers to sell at less than the suggested retail price. This price would not include sales tax. Mr. Sigouin testified that he never saw the sales contract for the car bought by the appellant.

The respondent called Pierre St-Aubin, Special Investigator with Revenue Canada, as a witness. Mr. St-Aubin testified that when he first saw the Jaguar in the Corelli parking lot, he had questioned the appellant about its acquisition. According to Mr. St-Aubin, the appellant had replied that it was not expensive because it had been in an accident and had been repaired. The appellant does not recall that he would have given such an explanation because the car was bought new. After some investigation, Mr. St-Aubin determined that the car had been purchased new from a dealer, Automobiles Igante. Mr. St-Aubin went to the dealer to obtain the sale’s contract. Only the first page of this sale’s contract was submitted into evidence. Mr. St-Aubin stated that at the time of photocopying the document, he had only been interested in the numbers and had not made a copy of the signatures on the back of the document. The dealer had since gone bankrupt and a complete copy of the contract could not be obtained. The appellant does not recognize the contract as it does not bear any signature but could not himself produce any other document.

The contract (Exhibit 1-16) is in the name of Corelli and is dated August 15, 1985. It indicates that the price of the automobile was $44,500, that $12,000 was allotted for the trade-in, and that taxes came to $3,025; thus, the net price paid for the car was $35,525. The contract also showed that a deposit of $300 was paid on the account. It is interesting to note that the contract directly refers to the 1982 Buick Riviera as the trade-in and that the serial number indicated, although difficult to read, matches the one stated on an insurance contract for the appellant’s own 1982 Buick Riviera (Exhibit A-7).

A bank deposit slip of Automobiles Igante, dated September 30, 1985 was presented by Mr. St-Aubin who also referred to other documents obtained during his investigation, copies of which have been submitted in evidence but objected to by counsel for the appellant. Although the copies are not clear, the testimony of Mr. St-Aubin concerning his investigation and how he obtained the documents are very thorough and precise. The bank slip indicates a deposit of $30,000 as coming from Corelli. As Mr. St-Aubin could not trace this payment through Corelli’s accounts, he went back to the dealer who then indicated to him that the deposit referred to a bank note negotiated at their branch of the Bank of Montréal. At the Bank of Montréal, Mr. St-Aubin traced the transaction to a $30,000 bank draft from the Toronto Dominion Bank. The records of the Toronto Dominion Bank indicated that the bank draft had been purchased in favour of Automobiles Igante by a certain Jimmy Morano to whom Automobiles Igante had not sold a car. I might add here that the car has not been indicated as an asset of Corelli in its 1985, 1986 and 1987 tax returns and attached financial statements (Exhibit I-3).

Mr. St-Aubin testified that he had been told, at the dealership, that the balance of the account had been paid in cash.

On the one hand, the only evidence that the appellant adduced to establish the purchase price of the Jaguar was his own testimony. Again, it was not credible. The appellant was very vague in his answers, stating that he did not remember his method of payment for the car although he would have remembered the exact price. There was no documentary evidence whatsoever to support the appellant’s submission that he paid only $30,000 net for the car. The evidence of Mr. Sigouin only suggested that the price might have been less than $45,775 before taxes.

On the other hand, the contract produced by the respondent is incomplete and does not contain the appellant’s signature. However, Mr. St- Aubin’s testimony supports a strong inference that this is a copy of the original contract as it was obtained directly from the dealer. This would suggest that the net sale price for the Jaguar was $35,525 including taxes. The burden was on the appellant to produce evidence to prove otherwise on the balance of probabilities. My conclusion is that this burden has not been met.

I will simply not draw any further inference from Mr. St-Aubin’s testimony and the additional documents, the production of which was objected to by counsel for the appellant.

4. Travel expenses

The following travel expenses were added to the appellant’s net worth assessment as personal expenses:

1984: $11,865

1985: $4,021

1986: $11,515

1987: $2,516

According to Mr. St-Aubin the expenses with respect to travelling were only added as personal expenses in the net worth computations when it was shown that the appellant had travelled with his family. The amounts added were supported by invoices and payments. Cash expenses were not estimated for the purpose of the net worth assessments.

In his notice of appeal and accompanying documents, the appellant submitted that the trips taken in 1984 and 1986 were for business purposes and therefore appropriately paid by Corelli and that the amount added should be reduced by $10,000 for each year. It was also the appellant’s submission that the 1985 amount should be reduced by $2,000.

(a) 1984 and 1985 taxation years:

The appellant testified that in 1984, he went to California and Mexico with his wife, his two daughters and his son to visit wineries, taste wine, meet people in the business and get new ideas. He submitted that it was done on behalf of Corelli and was thus a business trip. According to him, his wife also went on that trip for a business purpose as Vice-President of Corelli. However, the appellant conceded that a portion of the trip’s cost attributable to his three children, 30 per cent, was a personal expense.

The appellant also testified that he was uncertain whether he went to Italy or Spain in 1984. He stated, however, that he went to Italy every year for business, to meet suppliers and talk to people about business. He testified that he went to Italy in August 1985 for the $300,000 loan, a business matter.

Massimo Miucci, the appellant’s son, testified that the trip to California and Mexico was spent mostly travelling in the car. He stated that he had wanted to go to tourist sites and more particularly to Disneyland but that there was no time.

Anna Maria Miucci, the appellant’s daughter, also testified that much of that trip was spent travelling and visiting wineries.

Mr. St-Aubin had prepared a chart detailing the appellant’s travel expenses for 1984 and 1985 through actual payments of different accounts and invoices. As said before, Mr. St-Aubin did not try to evaluate the cash expenses that could also have been incurred during those trips.

A first amount of $4,951 was added in the net worth calculation. This amount is the total of three cheques drawn on the appellant’s personal account at the Royal Bank and made payable to the travel agent, Italian Express. Since this amount had not been claimed as travel expenses in Corelli’s books, Mr. St-Aubin assumed that it was incurred during a personal trip. There is no evidence that it was not.

An additional amount of $10,041 was attributed to the trip in California, Texas and Mexico. This amount is a compilation of expenses paid using an American Express card. Since this trip was made in late December 1984 and early January 1985, $6,724 was attributed to the 1984 taxation year and $3,317 was attributed to 1985. These amounts were the sum of hotel and restaurant bills from Los Angeles, Dallas, Austin, Houston, Acapulco and other places in Mexico.

The appellant did not present any real evidence to substantiate the business nature or the extent of the business nature of that trip. Beside giving the name of two wineries in Mexico, he did not testify as to which wineries he actually visited, which suppliers he met with, or any other details as to what would have been the business agenda during this trip. He merely made general statements that the trip was on account of business and that 30 per cent could have been personal because the three children accompanied him and his wife. The evidence is insufficient to support a conclusion that the amounts included by the Minister as personal travel expenses should be deleted or reduced in the net worth compilation. Moreover, I have no way of determining a reasonable proportion of these expenses as having been incurred for a genuine business purpose, if at all.

(b) 1986 taxation year:

The appellant testified that he had decided to expand Corelli’s business into the beer industry. In connection with this, he went to Germany, probably in the fall of 1986 (the appellant himself does not recall exactly), to meet with the chief of the Association of Brew Masters in Berlin. The appellant testified that he flew to Italy with his son and was then driven to Germany by a certain Eugenio Fontanese, a buyer and seller of grape juice, wines and equipment. Although Mr. Fontanese drove, the appellant absorbed all the expenses. Upon arriving in Germany, the appellant testified that he would have had to wait two days to meet with the chief. Rather than wait, he decided to go to Holland, Belgium, Luxembourg and France, to visit breweries. He then returned to Italy. The appellant testified that he brought his son with him because he wanted him to learn the family business. The appellant stated that he only went to Germany that one time.

When asked about a trip that one of his two daughters would have taken to Germany around the same time he answered the following:

A. My daughter, as a matter of fact, once both my daughters went to Germany, I think, together

Q. Yes.

A. ...for school purpose, studies.

Q. Villa Maria was the school?

A. Villa Maria, yes.

Q. Uh, huh.

A. But I don’t know if it was the same time, it is possible.

Q. Could it coincide....

A. It could have, it’s possible, but I don’t...this has nothing to do with the business trip for the brewery. They went for school, they stayed there alone and they stayed with the school. And there was a lady with an Italian name at Villa Maria that accompanied them to Austria, to Germany, and then they came back. [7]

Massimo Miucci, the appellant’s son, also testified that he went to Germany with his father to meet people to discuss the brewery project. Massimo stated that he was in grade six at the time and his father had asked his teacher if he could leave school for two weeks. Permission was granted as he would learn more during the trip than being at school. When they arrived in Germany, the person that they were supposed to meet was not available so they went to Holland and to other countries as well. Massimo testified that he was waiting in the car for most of the time and was bored while his father was discussing business. I will simply quote here his remarks in connection to this:

Again it was, it was the same sort of idea, we went just to get ideas, just to meet people for ... about the business. They were all business trips, we went ... my dad was meeting all kinds of people. I remember many times being stuck in a car, bored, you know, kicking rocks around while he was inside. I mean, naturally I got tired of it. [8]

When asked if he visited his sister in Germany, Massimo stated “No, we never did”. [9]

Anna Maria Miucci testified that she had studied German for two years at Villa Maria High School and that, as part of the program, she went to Germany with her class in the summer of 1986. She stated that her family did not visit her during this trip.

Mr. St-Aubin introduced copies of invoices and itineraries from Voyages JBL (1977) Inc. One invoice addressed to Anna Maria Miucci, dated May 1, 1986, specifies a “Tour Frankfurt” through the Villa Maria group for two persons beginning July 5, 1986. This invoice totalled $1,396.68. A second invoice to Anna Maria Miucci, dated May 30, 1986, was for air tickets for Miss A. Miucci and Miss L. Miucci totalling $1,878.52. The itinerary indicates that the flight would leave Montréal on June 21, 1986, and arrive in Frankfurt on June 22, 1986. The return trip on August 30, 1986 involved a flight from Rome to Frankfurt followed by a flight from Frankfurt to Montréal. A third invoice, addressed to the appellant and dated June 18, 1986, was for air tickets for the appellant, his wife and Mr. Miucci (most probably the appellant’s son, Massimo) totalling $6,842.78. The itinerary showed flights from Montreal to Frankfurt on July 7, 1986 from Frankfurt to Munich on July 8, 1986, the rental of a Mercedes station wagon in Munich on July 10, 1986 and flights from Rome to Frankfurt to Montréal on August 30, 1986. A note on this invoice stated “Pay this from Corelli account”.

Mr. St-Aubin testified that he determined that the total expenses referred to above for those trips had nothing to do with Corelli but represented personal expenses of the whole Miucci family.

There was some confusion during the testimony regarding the trips to Germany. This confusion seemed to stem from the fact that the appellant himself testified that he only went to Germany once with his son on account of the brewery project as illustrated by the following:

Q. How many trips did you make to Germany? Do you recall?

A. I went to Germany just that time, if I recall it, for that purpose. [10]

The written submissions of the appellant’s counsel, however, stated that as Mr. Miucci testified, he was in Germany on two occasions. [11]

Counsel for the appellant also stated that the “second trip” of the appellant to Germany, with his wife and Massimo (which in reality would have been the first), was not for business but was to visit his daughters. It also brings the credibility of Massimo Miucci into question since he testified that he never visited his sisters in Germany.

In the written submissions of counsel for the appellant it is admitted that the “second trip” to Germany, in the summer of 1986, was not for business, but was for personal reasons. In any event, the expenses for the trip that the appellant took to Germany with his son on account of the mini-brewery project and which the appellant submitted was for business reasons, were never included as personal expenses in the appellant’s net worth assessment. Therefore, the travel expenses added to the appellant’s net worth assessment for 1986 were in no way shown to be incorrect.

(c) 1987 taxation year:

The appellant testified that he might have gone to Italy in 1987, but that it was strictly for business. There was no evidence presented to support this statement.

Mr. St-Aubin testified that according to receipts from travel agents, the appellant went to Boston on September 5, 1987, along with his wife and one of his daughters; they returned the same day. Mr. St-Aubin also testified that receipts from Italian Express indicated that the appellant made a trip to Italy in 1987.

In the appellant’s counsel written submissions it is stated that the one- day trip to Boston was in connection with a brewery convention. However, this was not raised during the trial and no evidence was submitted on this point.

In summary, the appellant did not produce any real and credible evidence to show that the amounts included in the net worth statement as personal travel expenses were incorrect.

5. Miscellaneous expenses

Although the amounts under this heading are very small, some evidence was introduced with respect to certain items added by Mr. St-Aubin in his net worth calculation. Because counsel for both parties made some representation with respect to same, I have to reach a conclusion as to whether or not these amounts, based on estimates only, which was not the case for travel expenses, have been correctly added as personal expenses in the net worth calculation.

(a) Hair care:

An amount of $1,000 per year for the 1984 to 1987 taxation years was included in the appellant’s personal expenses for hair care.

The appellant testified that he goes to the barber every month or two and that each visit costs him $10; this would amount to between $90 and $120 per year.

No evidence was presented regarding the cost of hair care for the other four members of the family. However, as the amount of $1,000 was added on the basis of an estimate only, I am prepared to accept that $600 a year, as suggested by counsel for the respondent, should be a more accurate amount to be allocated for the family’s hair care.

(b) “Moped” expenses:

The net worth assessment allocated $200 for each of insurance, licences, gasoline and maintenance of a 50 cc. “moped”, for a total of $600 in 1987.

In the notice of appeal, the appellant estimated the “moped” expenses at $20 per year. In his testimony, the appellant stated that the “moped” could run for hundreds of kilometres on a litre of gas. Massimo Miucci testified that the “moped” was registered in the name of Corelli, but that he used it to drive around Corelli’s parking lot.

It did not consume much gas and only required cleaning the filter occasionally. He testified that the “moped” lasted two years and was then given away.

The respondent suggested an amount of $20 per month for four months on account of gasoline and maintenance in 1987. There was no evidence presented by the appellant to suggest any other amount. Nor did the appellant refer to the cost of insurance or licences. However, as the amounts added by the respondent for same are based upon an estimate only, I think that an amount of $100 each for insurance and licenses would be closer to reality. Therefore, the total amount of $600 should be reduced to $280.

(c) Mini-brewery project:

In his written submissions, the respondent conceded that the expenses under the item “projet brasserie” should be deleted from the appellant’s personal expenses. In the net worth assessments, Mr. St- Aubin had determined that these expenses were personal in nature as Corelli’s charter did not and could not authorize such activities. The evidence is to the contrary and further shows that a company was formed on March 31, 1988 for that purpose. The respondent conceded that the personal expenses element in the net worth calculation should normally be decreased by $95 in 1984 and by $1,107.50 in 1987. However, the result for the 1984 taxation year will rather flow from the answer given in the next item as to whether there is sufficient evidence to permit the reassessment for that year. As other expenses relating to the mini-brewery project had already been considered business expenses of Corelli and not personal expenses of the appellant, no further reduction in the net worth calculation is warranted.

6. Reassessment for the 1984 taxation year

The respondent admitted that the notice of reassessment for the appellant’s 1984 taxation year was issued beyond the normal three- year period. The reassessment should thus be governed by the wording of subparagraph 152(4)(a)(i) and paragraph 152(5)(b) of the Act.

Pursuant to these provisions, the Minister may assess beyond the normal limitation period if the taxpayer has made a misrepresentation that is attributable to neglect, carelessness, or wilful default. In the present case, the respondent submitted that the appellant had failed to report $17,530 in additional taxable income for 1984. However, in the written submissions for the respondent the following was submitted:

194. Concerning the reasons for the reopening of appellant’s 1984 taxation year, we respectfully submit the following reflections namely:

— as early as 1984, Corelli was carrying out wine-tasting events and it has been demonstrated based on the verified facts for 1987 that the revenue accounting system or if posted it was in a fanciful manner;

— as early as 1984, Corelli was involved in a fraudulent importation of wine from Italy;

195. However, after having considered at length Exhibits R-5 and R-9 in particular, we believe that the Court could reasonably conclude that the Minister of National Revenue has not discharged his onus of proof to demonstrate negligence or fraudulent representation concerning the 1984 taxation year;

196. Although the Court is not bound by any of our recommendations, we believe that the appeal concerning the 1984 taxation year could be allowed;

197. However, there is no equation to be made between this concession of the 1984 taxation year and the subsequent taxation years that remain under appeal such as 1985, 1986 and 1987;

198. The principal reason underlying our recommendation to the Court to allow the appeal for the 1984 taxation year is essentially based on the fact that the discrepancy in the net-worth totals an amount of $17,579.74 in 1984 which appears to us to be a relatively small amount;

199. This discrepancy by net-worth of $17,579.74 in 1984 seems to exist on the one part because of the slight increase of $7,348.78 in the assets in the net-worth and on the other part on an amount of $10,180.96 based on personal expenses. Although it is possible that in 1984 the appellant’s assets progressed in an important manner elsewhere that in Canada, for example in Italy, we must submit that the Respondent is not in a position to carry on an inquiry of this possibility;

200. Therefore, considering the modest discrepancy, that this discrepancy is substantially based on personal expenses, we feel that appellant’s situation in 1984 is different that his situation in the subsequent years. [12]

I will simply say that, on the whole, my own analysis leads me to the same conclusion. The appeal for 1984 will therefore be allowed and the full amount of $17,530 added both to income as well as corresponding penalties and interest will be deleted.

7. Penalties

In order for penalties to be assessed under subsection 163(2) of the Act, the respondent must show that the appellant acted knowingly or under circumstances amounting to gross negligence in making false statements or omissions in his income tax returns.

The respondent submitted that the source of the discrepancy between reported income and total income as reflected in the net worth statements was the unreported proceeds for sales of wine made by Corelli and profit generated at wine-tasting events, part of which would have been remitted directly to the appellant and not reported.

Unreported wine sales issue:

Mr. St-Aubin testified that during his investigation of Corelli’s affairs, which lasted over a year, he contacted suppliers of bottles and plastic bags and determined that for 1987 Corelli bought containers used for marketing wine far in excess of what would have been used to account for the actual net sales to the SAQ in 1987, that is to say around 25,000 hectolitres versus approximately the 18,000 hectolitres sold to the SAQ.

Mr. St-Aubin also determined that the amount of sugar bought would have been, according to the figures given by the SAQ, around six times the amount of sugar required to produce the wine bought by the SAQ Given the quantities of sugar bought, and based upon the information he had from the SAQ that no sugar was required to market grape juice, Mr. St-Aubin concluded that the additional potential of wine production would have been in the magnitude of $900,000 more or less 10 per cent in the 1987 year alone. According to Mr. St-Aubin, other elements also seemed to indicate that Corelli was in fact producing and selling more wine than reported. According to him, the investigation also revealed that some eight out of nine shipments imported from Spain were in reality wine and not grape juice as indicated on the bills of lading.

From the information he obtained from the SAQ concerning the high concentration of Spanish wine, Mr. St-Aubin also concluded that the quantity of that wine could have been augmented by adding sugar and refermenting it.

Police seizures of wine at Italmosto, one of Corelli’s major purchaser of juice, was also considered by Mr. St-Aubin one of the reasons for the conclusion he reached following his investigation. Visits to clients of Corelli, who were purchasing wine with private labelling, also revealed that one of Corelli’s employees was selling wine regularly without going through the SAQ. These sales were also a potential source of income not reported by Corelli or by the employee.

Mr. Christian Parent, Investigator with Revenue Canada, Customs and Excise, testified with regards to the seizure of two shipments of wine from Italy and Spain to Corelli in June 1987. These shipments were described, on the bills of lading originating from the exporter, as “grape must” (mot de jus de raisin). In fact, it was suspected that Corelli was arranging the use of false bills of lading to evade the payment of various taxes and duties. A certain quantity of the wine seized in tankers was left on Corelli’s premises following the release of the tankers belonging to a third party. Although the wine was still under seizure, it was left under Corelli’s care and was not to be used in any manner. The wine eventually disappeared as it was eventually mixed with other wine by Corelli’s employees. However, the appellant said that he was in Europe at that time and that the mistake made by Corelli’s employees was attributable to the fact that the tank in which the seized wine had been placed had not been sealed by the authorities.

Following an inquiry conducted in Italy and Spain, the Minister issued, in October 1988, a notice of ascertained forfeiture against Corelli and the appellant for additional taxes and duties. This notice was in respect of previous importations of wine from Spain during 1986 and 1987 which were described as being grape must or juice. The decision of the Minister is still the object of judicial proceedings in the Trial Division of the Federal Court.

In February 1989, another notice of ascertained forfeiture was issued against Corelli and the appellant which claimed additional taxes and duties of over $2,000,000 with respect to various importations from Italy between July 1984 and July 1986. The statement of claim filed by the appellant in the Trial Division of the Federal Court was statute- barred and was thus rejected in a decision rendered in November 1991 which was confirmed in December 1993 by the Federal Court of Appeal.

Counsel for the respondent also submitted in evidence the decision of the Régis dated March 7, 1989, which revoked the industrial wine- making permit held by Corelli (Exhibit 1-9) mainly on the basis of an undescribable administrative mess in the conduct of its affairs and the lack of proper documents and reports.

In his testimony, the appellant denies that there was wrongdoing on the part of Corelli or on his part with respect to importations of wine and more particularly with respect to the false description that would have been made on certain bills of lading which was, according to him, the sole responsibility of the exporter.

In reply to Mr. St-Aubin’s testimony concerning the estimated wine production capacity of Corelli in 1987, the appellant essentially testified that with respect to the amount of bottles, a number of facts were not considered by Mr. St-Aubin, namely, sales outside the province (from 5 per cent to 10 per cent), breakage (3 per cent to 4 per cent), returns by the SAQ and most importantly the fact that bottles were supplied to Italmosto and other purchasers of juice for the purpose of retailing and offering packaged deals to their clients who would produce and bottle their own wine. Invoices totalling $1,891,648 (Exhibit A-23) for the sale of juice between 1985 and 1987 were submitted in evidence to support this particular assertion. I will only comment here that the invoices submitted concerning the sale of juice for Corelli’s 1987 taxation year ending August 31, 1987, totalled only $450,459, which is less than half the total sales of $991,336 that would have in fact been reported by Corelli for that year as ascertained by Mr. St-Aubin. [13] More importantly, I fail to see the relation to the providing of bottles to purchasers of grape juice as these invoices contain no mention whatsoever of bottles being supplied with the juice sold. They only refer to bulk quantities of juice sold, of so many hundreds or thousands of gallons each time, sometimes with the mention “approximately”. On almost all the invoices submitted the mode of delivery is indicated as being by means of a truck owned by the purchaser. As no container of any sort is indicated, one might even be inclined to conclude that the juice could have been sold in bulk and transported in “tankers”.

With respect to the large quantities of sugar bought in 1987, as ascertained by Mr. St-Aubin during his investigation, the appellant’s position is that sugar was not only used to produce wine from juice but was also used in the marketing of juice itself.

Mr. Carmine Seccareccia, a chemist who worked for Corelli between 1982 and 1.984, was also called to testify on the use of sugar in the production of wine. He explained the use of sugar for the purpose of marketing juice. Juice has to yield a certain alcohol level after fermentation, so that, depending on the analysis made, adjustments have to be made by adding sugar and sometimes water before the juice can be packaged for sale.

Using Mr. Seccareccia’s figure of 6.4 to 6.5 kilograms of sugar per 100 litres or one hectolitre of juice, which is the amount typically used to produce wine, applied to approximately 18,000 hectolitres of wine sold to the SAQ in 1987, would mean that 117,000 kilograms of sugar would have been needed. This is more than twice the amount of 49,074 kilograms which the SAQ quoted to Mr. St-Aubin as having been necessary to produce the quantity purchased.

Moreover, if one wants to extrapolate and use Mr. Seccareccia’s figure concerning the amount of sugar that needs to be added to juice in order to produce wine, if sugar was added to all the juice sold during Corelli’s 1987 taxation year (approximately 300,000 gallons or 13,635 hectolitres), which is most improbable, that would still leave enormous quantities of sugar unaccounted for. In fact, even using those inflated figures, we realize that Corelli’s purchases of sugar for the 1987 taxation year only would have been at least one and one-half to two times more than what was needed, both for the production of wine and marketing of grape juice.

After careful analysis of all the figures put forward, I am of the opinion that the explanations given by the appellant, or on his behalf, concerning the use of bottles and sugar in marketing grape juice are far from convincing that the wine production capacity would have been grossly exaggerated by Mr. St-Aubin.

As pointed out by counsel for the respondent, it is strange that a chemist who worked for Corelli in 1985, 1986 or 1987 was not called as a witness to explain in a more meaningful manner and with some significant production reports, which should have been made and kept, the whole process of production at Corelli during those years and more particularly in 1987, the year which was thoroughly investigated by Mr. St-Aubin.

The issue of parallel sales of wine was also denied by the appellant. He stated that although police seizures of wine were made at Italmosto, he could not be held responsible for these events as he was not in control of what the purchaser of juice did with it. He suggested the possibility that the juice bought by Italmosto would not have been kept at the appropriate temperature and would have started to ferment so that by that time it might have proven to be wine.

The appellant denied that there were any direct sales of wine by Corelli employees, without going through the SAQ. He explained that it was customary to give wine to potential purchasers as part of promotional activities. One is left completely in the dark as to the importance of such promotional activities as no meaningful records of any sort were produced or were even shown to exist.

Wine-tasting events:

Mr. St-Aubin testified that during his investigation he met with Sandra Audet and Edith Fernandez, employees of Corelli from March to December 1987. They had been employed by Corelli to organize winetasting events to promote Corelli’s products. They revealed that they had an arrangement whereby the profits of these events, which were organized for groups and where people would pay approximately $10 each, were shared equally between them and the appellant. The wine for those events was alleged to have been paid for in cash to the appellant, as was his share of the profits. Pay cheques issued by Corelli as well as an amount covering “benefits” that Corelli would have to pay with respect to their salary would also have been returned in cash to the appellant. From the information gathered, Mr. St-Aubin prepared, with the two employees, a detailed statement of income and expenses. This statement showed that for a six month period, some $5,144.74 worth of wine would have been purchased from Corelli and another $12,442.33 would have been remitted to the appellant as his share of the profits. Over and above this, amounts remitted for the salaries have to be taken into account.

Edith Fernandez testified that the proceeds of wine-tasting events, in cash and cheques, were usually handed to the appellant personally. Ms. Fernandez also testified that the appellant would issue cheques from Corelli in her name for which she would give back cash to the appellant. However, in cross-examination, she rather said that the appellant gave her cash in return for the cheque, as a method of cashing her pay cheque.

The appellant himself testified that Corelli had hired employees to be in charge of the wine-tasting events to promote its products and that these employees would prepare these events, buy the cheese, arrange for music, and collect about $10 from each participant. Corelli would supply the wine free. The gross income from the events was split 50/50 between Corelli and the employees. The appellant also said that a cheque was issued to the employees each week as well as a yearly T-4 slip. As to Corelli’s share of the proceeds, the appellant testified that it was “a few hundred dollars” each week. According to him the money was recorded in the Corelli books and deposited in Corelli’s account as were all other proceeds of sales. The appellant also testified that he did not take cash from the company without recording it in the books and submitted in evidence bank deposit books showing deposits of cheques as well as cash.

Although the wine-tasting events had been organized over a certain number of years, I must again comment that no documents of any kind were submitted- to show how and where the income was recorded. According to the statement prepared by Mr. St-Aubin, this income would have been more than the “few hundred dollars a week”, as stated by the appellant, if accounted for in a proper and rigorous fashion. One can simply not find a relation between the bank deposit books submitted in evidence and Corelli’s share of the proceeds from the wine- tasting events. We cannot infer that because some cash received by Corelli was recorded and deposited, that it was always done. It is completely impossible to trace the accounting of those amounts through the documents submitted.

The position of counsel for the respondent with respect to penalties for the 1985, 1986 and 1987 taxation years is as follows:

201 Contrary to the 1984 taxation year, we respectfully submit that the Minister of National Revenue has discharged his onus of proof by establishing by balance of probabilities appellant’s gross negligence during the 1985, 1986 and 1987 taxation years;

202 We believe that the Minister has established by a balance of

probabilities, if not proving beyond any reasonable doubt that:

— there existed an undescribable administrative muddle in Corelli (see Exhibit R-9);

— there existed a total absence of internal control concerning Corelli’s wine production;

— the probability of an unaccounted wine sales was very strong (security report, Exhibit A-9);

- considering that Mr. Miucci’s personal credibility is non-existent and that he was involved in numerous tortuous transactions involving middlepersons here in Canada and abroad;

— a substantial discrepancy compared to the declared income. [14]

While I agree with the elements mentioned, I must add that the evidence presented by the respondent is almost totally circumstantial. However, in a case of this nature, one cannot simply accept that financial statements per se, even audited, would necessarily account for the whole reality. This is especially true given the fact that they were not backed at trial by more specific and cogent records of activities that have been investigated and for which no direct audit would seem to have been possible due to the lack of proper documentation. Moreover, the evidence adduced in this case concerning Corelli’s production of wine and marketing of grape juice has not been substantiated by any meaningful or significant report or document that could have convinced me that the appellant’s testimony could be given any degree of credibility. For example, the type of evidence submitted with respect to the use of sugar and bottles in the marketing of grape juice tends to weaken, rather than enhance, the appellant’s position because no direct and meaningful connection can be made between the assertions in the testimonies and the documents presented in support so as to be able to ascertain exactly what would have actually happened.

Moreover, the decision of the Régis referred to by counsel for the respondent (Exhibit I-9) goes very far and the findings made thereto are very precise as to the state of the administration of Corelli’s business over the years. [15] It also lends more credibility to the conclusions reached by the respondent after the investigation conducted by Mr. St-Aubin. I might just quote from that decision, a comment preceding the conclusion on the state of affairs at Corelli:

Le dernier témoignage, celui du président de la compagnie Les Vins Corelli Inc., monsieur Giovanni Miucci vient confirmer malgré lui toutes les irrégularités constatées contre son entreprise. Il dit à de multiples reprises qu’il ne s’est jamais inétressé aux opérations quotidiennes de son entreprise, qu’il n’a aucune idée de l’endroit où peuvent se trouver les documents requis par la Loi, qu’il n’a jamais fait lui-même de rapports, que ses employés sont incompétents, qu’il n’a jamais mis en place de systèmes administratifs capables de supporter le suivi de ses opérations, qu’il n’a pas de réel contrôle sur ses stocks et sur la provenance de matières premières utilisées.. [16]

In their written submissions, counsel for the appellant stated that the respondent had the burden of proving “gross negligence” rather than “negligence” with regards to the conduct of the appellant’s affairs and argued that “the respondent has failed utterly to satisfy the requirements established by law and jurisprudence on this point”. [17] They relied more particularly on the following cases:

— Waxstein v. Minister of National Revenue, [1980] C.T.C. 2398, 80 D.T.C. 1348 (T.R.B.)

— Boileau v. Minister of National Revenue, [1989] 2 C.T.C. 2001, 89 D.T.C. 247 (T.C.C.)

— Fortis et al. v. Minister of National Revenue, [1986] 2 C.T.C. 2378, 86 D.T.C. 1795 (T.C.C.)

In the case of Waxstein, supra, it is clear that the respondent never presented any evidence that the penalties would be justified. Moreover, there was no suggestion by the respondent as to how the net worth would have been increased or that the appellant was not credible. Such a situation hardly bears any resemblance with the present case.

In the case of Boileau, supra, Judge Lamarre Proulx of this court decided to maintain for the most part net worth assessments against a taxpayer but refused to apply the penalties under subsection 163(2) because of unsatisfactory evidence produced by the Minister. One must remember however that the taxpayer himself was not called as a witness so that again the court was not in a position to ascertain his credibility. The following passage of the judgment illustrates the point (Boileau, supra, pages 2005-06, (D.T.C. 250)):

I am, however of the view that subsection 163(3) does require that the Minister produce some evidence, of satisfactory composition, that the appellant knowingly, or under circumstances amounting to gross negligence, in the carrying on of any duty or obligation imposed upon him, made a false statement or omission in a return.

Indeed, the appellant was unable to contradict the basic elements of the net worth assessments. However, in my view, this is not sufficient for discharging the burden of proof which lies on the Minister. To decide otherwise would be to remove any purpose to subsection 163(3) by reverting the Minister’s burden of proof back onto the appellant.

There is no doubt that the mens rea or the gross negligence may be established by circumstantial evidence, as either can seldom be established by direct proof of the taxpayer’s intention. However, that evidence should be clear and convincing, for example: the course of conduct of the taxpayer, what it is that ought to have been done that was not done, what led the respondent to assess the penalty, discussions that took place with the taxpayer in respect of the assessment of the penalties and other matters pertinent to the decision leading to the assessment of the penalty under subsection 163(2). [18]

In Fortis, supra, Judge Rip of this court came to the following conclusion with respect to the evidence necessary to sustain the assessment of penalties and more particularly to the need of establishing affirmatively the amount of understated income (Fortis, supra, [1986] 2 C.T.C. 2378 at pages 2386-87, (D.T.C. 1801-02). See also Chopp v. Minister of National Revenue, [1987] 2 C.T.C. 2071, 87 D.T.C. 374 and Stirton v. Minister of National Revenue, [1988] 1 C.T.C. 2298, 88 D.T.C. 1205.):

No evidence was led by the Minister to establish any fact justifying the assessment of penalties. The unreported income determined by Mr. Dykstra for each appellant was only an estimate, at best. Mr. Fortis’ claim that the increase in his net worth was due to gambling winnings was corroborated; the extent of his actual winnings is unknown. Some of the additional income assessed Mr. Fortis may represent gambling winnings. Mr. Pappas was able to establish that he borrowed money from Mr. Meagher, at least, but could not establish the dates of the loan. It is clear that the statements of net worth for Mr. Pappas did not take into account the liability of Mr. Meagher either in 1978 or 1979; the Minister did not prove that the liability would not reduce the net worth of Mr. Pappas for the particular year. The production by the Minister of the net worth statements he prepared in making the assessments is only proof of the existence of the statements; for purposes of subsection 163(3) their contents must be established and this the Minister has failed to do.

The appeals will be allowed only for the purpose of deleting the penalties from the assessments appealed from; the appellants shall be entitled to one-half of their party and party costs, if any. [19]

The Federal Court, Trial Division refused to follow Fortis, supra in the case of Kerr v. R. (sub nom. Kerr v. The Queen), [1989] 2 C.T.C. 112, 89 D.T.C. 5348 at page 121, (D.T.C. 5354-55) in the following terms:

The proposition that the Minister should establish the precise quantum of understated income before a penalty can be imposed is supported by Fortis et al. v. Minister of National Revenue, [1986] 2 C.T.C. 2378 at 2386, 86 D.T.C. 1795, where the Court found that because the unreported income as determined by a net worth assessment was at best an estimate no penalty could be imposed.

If that is the case then it would follow that there could never be a penalty imposed where there has been a net worth assessment. /n order to support a penalty under subsection 163(2) it is not necessary, in my view, to establish precisely the exact quantum of unreported income. It is sufficient that the Minister establishes that there has been gross negligence or circumstances amounting to gross negligence in making a false statement in an income tax return.

In this case the plaintiff, through her counsel and expert, admits that there has been an under-reporting of income over the period in review. The only question for the Court to determine is the amount of the income under- reported. The plaintiff admits that proper business books of accounts were not kept. This may be good practice if one is conducting an unlawful business but Revenue Canada is not concerned with the source of the income. It is only concerned that proper records are maintained so that the amount of the income can be reasonably verified. In this case I have found that there has been in each of the years under review a substantial amount of income under-reported, from two to three times the amount of income actually reported. The plaintiff has offered no explanation whatsoever. Instead she has merely argued that there are some inaccuracies in the Minister’s calculations. Indeed, even her Own expert witness concedes that in two of the four years under review unreported income is more than reported income.

It was negligent of the plaintiff not to keep adequate records disclosing her income and in the case of the very substantial difference between her reported income and her actual income and her failure to offer any credible explanation for the difference I cannot say she was anything but grossly negligent in falsely stating the amount of her income in her income tax returns for each of the four years under review. Under these circumstances I will dismiss the plaintiffs appeal against the imposition of the penalties imposed.

[Emphasis added.]

This decision was followed more recently by the Tax Court of Canada in Saikely v. Minister of National Revenue, [1993] 1 C.T.C. 2673, 93 D.T.C. 397.

As to the Fortis, supra decision, it was appealed by the Crown to the Federal Court, Trial Division by way of trial de novo. [20] However, as the taxpayer did not intend to defend the action, the appeal was allowed and the penalties restored on the basis of the decision of the same court in Kerr, supra.

The evidence presented by the respondent in the present case went far beyond simple reliance on net worth assessments which could not, for the most part, be challenged effectively by the appellant with some credible testimony and substantiating documents. It uncovers a state of affairs at Corelli which indicated, with a very high degree of probability, that important sums of money could have been appropriated by the appellant. These sums would have been the source of the wide discrepancy between the modest reported income and the amounts shown in the net worth assess- ments, which are for the most part not based simply on estimates. The general lack of meaningful documentation by way of reports or records of production at Corelli or concerning the accounting of income from the wine-tasting events is patent. Payment of personal expenses of the appellant and his family by Corelli was admitted and was also established particularly with respect to the 1986 trip to Europe.

In my opinion, the fact that the appellant could not establish with cogent and credible evidence the source of funds for the $300,000 purchase of Corelli’s shares held by Mr. Mancini, is also of the utmost importance. The same holds true concerning the $90,000 purported loan by the appellant to his brother-in-law and the purported repayment of that loan with “some interest” which was in fact never reported.

All this leads to the almost unescapable conclusion that the appellant acted knowingly or at least has been grossly negligent in his conduct by doing things that he should not have done and not doing others that he ought to have done.

In a recent case, Farm Business Consultants Inc. v. R. (sub nom. Farm Business Consultants Inc. v. The Queen), The Queen, [1994] 2 C.T.C. 2450, 95 D.T.C. 200, at page 2457 (D.T.C. 205-06), Judge Bowman of this Court, having analyzed the nature of the penalties under subsection 163(2) of the Act, concluded with the following remarks:

Moreover, where a penalty is imposed under subsection 163(2) although a civil standard of proof is required, if a taxpayer's conduct is consistent with two viable and reasonable hypothesis, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted. [4] I think that in this case the required degree of probability has been established by the respondent, and that no hypothesis that is inconsistent with that advanced by the respondent is sustainable on the basis of the evidence adduced.

Had I been able to construe the statute, or to view the evidence, in a manner that permitted me to give the appellant the benefit of the doubt I would have done so. That course of action is not open to me.

8. Carry-back of allowable business investment loss of 1988

I will finally address the issue of the allowable business investment loss claimed by the appellant in his 1988 taxation year and which has been recognized as valid by the respondent. It has been established by the respondent that at the time of trial, a balance of $216,000 was available to be applied retrospectively in order to reduce the income of the three preceding years depending on the amount of income determined for those years. However, as the respondent had been waiting for the decision of this court to reassess, I am of the opinion that in the assessments to be issued following the present decision for the years 1985, 1986 and 1987, the respondent should take the $216,000 remaining balance of the loss sustained in 1988 into account and apply it against the income for the appellant’s 1985 taxation year.

Decision

From the foregoing:

- the appeal for the 1984 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the additional amount of $17,579.74 should not be included in the appellant’s income for the year and that the penalty should be deleted;

- the appeal for the 1985 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the additional income is to be reduced by an amount of $400 in respect of “hair care”, with corresponding adjustments to penalty and interest and also to take into account the carry-back of the balance of the allowable business investment loss of 1988;

- the appeal for the 1986 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the additional income is to be reduced by an amount of $400 with respect to “hair care” with corresponding adjustments to penalty and interest;

— the appeal for the 1987 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the additional income is to be reduced by an amount of $400 in respect of “hair care”, $320 in respect of expenses related to the “moped” and $1,107.50 in respect of the mini-brewery project for a total of $1,827.50 with corresponding adjustments to penalty and interest.

Pursuant to subsection 5(2) of the Tax Court of Canada Rules of Practice and Procedure for the Award of Costs (Income Tax Act)^ [21] a

fixed sum of $700 is awarded for costs to the appellant with respect to the 1984 taxation year. Appeal allowed in part.