Pompa v. R., [1996] 1 CTC 2595 (Informal Procedure)

Garon J.T.C.C.: — These are appeals from income tax assessments issued by the Minister of National Revenue for the 1987 and 1988 taxation years. By those assessments, the Minister of National Revenue included the amounts of $10,450 and $4,745 in the appellant’s income, respectively for the taxation years 1987 and 1988. The Minister of National Revenue also assessed penalties of $564 in 1987 and $266 in 1988 under subsection 163(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the “Act”) in respect of the non-inclusion in the income of the amounts in question.

According to the Minister of National Revenue, the aforementioned amounts that were added to the appellant’s income represented amounts that he apparently received in cash as remuneration during the two years in issue from his employers Dunn & Benoît Construction (Canada) Inc. (“Dunn & Benoît”) and Construction M.B.A.Ltée (“Construction MBA”). According to the Minister, these amounts were included in the appellant’s income in accordance with section 3 and subsection 5(1) of the Income Tax Act.

For reasons of convenience, unless otherwise indicated, I shall refer only to Dunn & Benoît in these reasons as though that firm were the appellant’s only employer. MBA had the same two shareholders and officers as Dunn & Benoît, that is, Messrs. Serge Moffat and Gerry Benoît.

The appellant was the only person to testify on his behalf. He stated during his testimony that he had never received part of his remuneration in cash during the two years that concern us, when he was a dayworker foreman in the service of Dunn & Benoît. He stated that his hourly rate as a dayworker foreman was $0.80 more than that applying to a dayworker who was not a foreman. This was what was occasionally called “the foreman’s premium”. All this data respecting the appellant’s remuneration was provided to the Office de construction du Québec “O.C.Q.”).

As to the matter of overtime, the appellant admitted that he had done supernumerary working hours during 1987 and 1988, but he stated that it was impossible he had worked during those two years the number of hours that had been attributed to him by the Minister of National Revenue. During his testimony, the appellant referred to the O.C.Q. statement in which it is indicated that he had worked 1,852 hours in 1987 and 1,960 hours in 1988.

The appellant stated that he was required to take four weeks’ vacation per year. He added that he did not work on statutory holidays or rainy days. He therefore estimated the number of work weeks for each of those years at 45 or 46. He stated that it was not possible that he had worked a number of overtime hours that would correspond to the amounts added to his income for 1987 and 1988. It will be remembered that the amount of $10,450 was added to his income for 1987 and an amount of $4,745 to his income for 1988. At an hourly rate of $14 to $15, he would have had to work between 700 and 750 overtime hours in 1987 and between 300 and 340 overtime hours in 1988. He would thus have worked about 16 overtime hours per week in 1987 and about seven overtime hours per week in 1988.

It is now interesting to consider his testimony as to the manner in which he was paid for those supernumerary hours: [1]

Q. You said that you occasionally did a few extra hours?

A. Yes.

Q. In eighty-seven (87) and in eighty- eight (88)?

A. Yes. There were times when I did a few extra hours. It’s written on the paper. I was paid my forty (40) hours.

Q. You were paid for your forty (40) hours?

A. For my forty (40) hours. When you get to a certain age, when it begins to pay, you go and claim it. You want to continue working; you don’t want to lose your job for half an hour, for an hour or two hours. It’s not because I didn’t receive an hour, that I was not paid, that I was going to leave the job. You continue to work. When you’ve done an hour more than the forty (40) hours in a week and you’re not paid, you’re not going to drop the job and leave. I still continued working the whole time. You always have a job to do.

Q. In other words, you mean that when you worked for Dunn & Benoit. . .

A. Yes.

Q.... or Construction MBA, sometimes you weren’t paid for all your hours of work?

A. No, my forty (40) hours were paid.

Q. Yes, but if there was overtime?

A. If you did a few hours that were urgent for the end of the evening, they didn’t count.

[Translation.]

Furthermore, he stated in cross-examination that he was paid for his hours of work on Saturdays, as appears from the following excerpt: [2]

Q. Are you telling me now that, all the times when you went in on Saturday and when, if I understand correctly, you were entitled to be paid double time . . .w

A. Yes?

Q.... you were paid double time on your cheque stubs?

A. Yes, when I went in.

[Translation.]

In an excerpt from his testimony gathered at a first hearing of these appeals in January 1993 before another judge of this Court - an excerpt that was adduced in evidence at this hearing of these appeals - it appears that he had agreed to work on Saturdays without being remunerated.

Documentary evidence was filed respecting the appellant’s remuneration during the period that concerns us, and that evidence was abundant as regards the year 1988. So, adduced in evidence were cheque stubs for the years 1987 and 1988, O.C.Q. statements for the same years, the attendance sheets and the worksheets relating to a period of about eight months in the year 1988. This last period during the year 1988 begins with the appellant’s work week ending on March 5 and ends with the week that ended on September 17 of that same year, according to the computerized statements for the years 1987 and 1988.

The appellant’s testimony was followed by that of Mr. Bradford Cairns, who was in Dunn & Benoit’s service during a period of one and a half years ending in January 1989. Mr. Cairns had to ensure that the required materials and equipment were available on the sites. It was also Mr. Cairns who distributed the white and brown envelopes to the foremen. He stated that Serge Moffat and Gerry Benoît also occasionally took part in the distribution of those same envelopes. The same witness stated in particular that roughly 75 per cent of the workers on the sites received white and brown envelopes. He was not entirely certain whether the foremen received their own remuneration in white and brown envelopes. Nor did he remember whether or not the appellant was a foreman, but he was certain that he worked on Dunn & Benoit’s sites at the time that concerns us.

It appears from the testimony of Mr. Moffat, president of Dunn & Benoît and of Construction MBA and the holder of 50 per cent of the shares of the capital stock of each of those firms, that he concerned himself with the proper operation of the construction sites. He stated that about 125 workers worked at the same time on Dunn & Benoît’s six or seven construction sites. He indicated, without being entirely sure, that the appellant received a $1 hourly premium as a foreman prior to March 7, 1988. Starting on that date, those premiums had to be included in the pay cheque in accordance with a directive from Mr. Moffat himself.

Mr. Moffat also confirmed that Formes Horizontales was only a technique used by Dunn & Benoît to pay in cash the overtime of employees on the sites and occasionally suppliers’ accounts.

Mr. Moffat explained that the appellant was occasionally responsible for a given site, but that there was normally a carpenter foreman or a superintendent on the same site. Mr. Moffat could not remember whether or not he had given envelopes to the appellant. According to this witness, the fact that the appellant’s name appeared on the attendance sheets for certain Saturdays constituted an indication that he had in fact worked on the sites on those days. He remembered that he had seen the appellant on the sites, but could not state whether he had seen him on a specific day on which it was indicated that the appellant had done overtime. Mr. Moffat stated that there had been periods of time when employees were paid in cash not only in respect of overtime, but also in respect of regular hours of work. Mr. Moffat also indicated, without specifying the percentage, that the majority of employees working on sites were paid in cash in respect of overtime. Mr. Moffat also corroborated the testimony of Mr. Cairns concerning the latter’s role in the distribution of the pay envelopes.

Mr. Gilles Barbeau, an employee in the service of Dunn & Benoît for approximately one year during the period that concerns us, was called to give his version of the facts respecting certain activities of Dunn & Benoît. Mr. Barbeau was a carpenter’s apprentice at the time he was hired by Dunn & Benoît. Mr. Denis Allard was usually Mr. Barbeau’s foreman during his period of employment with Dunn & Benoît. Mr. Barbeau explained the system of remuneration at Dunn & Benoît in the following terms: [3]

Q. Indeed! When you arrived at Dunn & Benoît, could you explain to us what the system was with respect to the recording of hours and the payment of those hours?

A. Yes. We worked our regular hours paid by cheque and the overtime was paid in cash. In my case, it was ten dollars ($10) an hour in cash for overtime hours. And the regular hours were paid on the normal “payroll” with the cheque stubs.

Q. How much time did it take after your arrival at Dunn & Benoît for you to be aware of this system?

A. The first week because it always takes about three weeks before you receive the first pay cheque.

Q. The first of the pays?

A. Because they always hold back two weeks and, after that, well, they begin to pay you. And he had.... I don’t remember him because it was different. Some withhold two weeks, and some withhold one week. I don’t remember with Dunn & Benoît; it’s been such a long time. But I know that it wasn’t.. .it takes one to two weeks, in any case, before receiving a first cheque. In my case, I worked the entire first week. In the second week, or at the end of the first week, he approached me to say: “If you want to work overtime, we pay for that in cash”.

Q. Who are you talking about? Who talked to you?

A. It was Denis Allard.

Q. Who was that, Denis Allard?

A. That was the site foreman.

Q. Was he your usual foreman?

A. Yes.

[Translation.]

Mr. Barbeau thus stated that he had had no other choice but to agree to be paid in cash for the overtime hours of work he might have done.

The only other testimony that offers a certain interest was that of Mrs. Sylvie Dubuc. She was assigned to employee remuneration starting in the fall of 1987 until December 1988. In her testimony, Mrs. Dubuc explained her role regarding the remuneration of the employees working on Dunn & Benoît’s sites and the procedure that was followed respecting the establishment of the employees’ remuneration and the routing of that remuneration. First of all, the compensation system was computerized. Every Monday morning, she received the attendance sheets on which each employee’s hours of work were indicated. The data recorded on computer did not take into account the overtime. The hours of work exceeding eight hours in a working day and the hours of work on Saturdays were paid at straight-time and in cash. Worksheets relating to the remuneration of each employee were prepared by Mrs. Dubuc. The cash amounts payable to each employee appeared on those sheets. Those monies came from “Formes Horizontales”.

On Thursday mornings, pay day, Mr. Benoît went to the office with the required amount in cash for each employee. The pay cheques that had already been prepared were put in a white envelope and a certain cash amount (no coins) in a brown envelope. The pay cheques were prepared taking into account the required source deductions, whereas the part of the remuneration paid in cash was subject to no deduction. These brown and white envelopes were delivered to the appropriate foreman, most of the time by Mr. Cairns, and occasionally by Messrs. Benoît and Moffat.

It should also be mentioned that counsel for the respondent clearly established that Mr. Jules Lévesque, the carpenter foreman or the superintendent, depending on the size of the construction sites in question, was unable to testify at this hearing because of a stroke he had suffered several months ago.

I would now like to make remarks as to the witnesses’ credibility and some of the evidence.

First, the appellant was particularly aggressive during this hearing. Although I can understand his impatience to a certain degree, considering all circumstances, it is no less true that he displayed an obvious lack of good manners on a number of occasions. Furthermore, his answers in certain circumstances seemed to me deliberately evasive; he even appeared to me to be confused at certain times. All things considered, I have some doubts as to his credibility. Furthermore, the testimony of Mrs. Dubuc and Mr. Cairns seemed to me truthful. They were disinterested and honest witnesses.

I now come to the matter of the determination of the appellant’s number of overtime hours during the years 1987 and 1988. First of all, I believe I am justified, according to the evidence, in taking into account a working year of about 45 weeks. I also take into consideration in this matter the point that the appellant must have been remunerated at an hourly rate that I have estimated at $14.50 for the year 1987 and, according to Mrs. Dubuc’s testimony, at an hourly rate of $15.33 for the year 1988. It also appears that the $1 foreman’s premium was not included in the hourly rates I have just mentioned. On the basis of this data and the amounts added to the income by the assessments for the 1987 and 1988 taxation years, the appellant would have worked an average of roughly 57 hours for 45 weeks in 1987 and about 50 hours for the same number of weeks in 1988.

All things considered, it seems to me probable that the appellant did not do the number of overtime hours that was estimated by the Minister of National Revenue for the year 1987. On the other hand, the evidence put forward by the respondent in respect of the number of overtime hours of work for the year 1988 appears to me to be stronger and more realistic.

I must also note that there is no direct evidence that brown envelopes were forwarded to the appellant by the foreman Jules Lévesque or by another person during the two taxation years that concern us. According to the testimony of Mrs. Dubuc and Mr. Cairns, it appears that a certain number of employees did not receive brown envelopes and consequently did not receive part of their remuneration in cash. The documentary evidence, particularly abundant for the 1988 taxation year, makes it a plausible possibility that the appellant may have received part of his remuneration in cash in 1988.

In examining the whole of this evidence, I have taken into account the context in which a large number of procedures, manoeuvres and stratagems were used by Dunn & Benoît and certain persons in the service of that company to pay amounts in cash to a large number of employees as part of their remuneration.

As to the 1988 taxation year, I therefore conclude that the appellant probably received part of his remuneration in cash. In my view, the appellant did not show that the assessment for 1988 was incorrect and the onus was on him to do so. With respect to that same taxation year 1988, the assessment of the penalties appears to me justified, the respondent having adduced sufficiently convincing evidence to discharge the burden imposed on the Minister of National Revenue by subsection 163(3) of the Income Tax Act. It must not be forgotten in this regard that, from the moment it is probable the appellant received part of his remuneration in cash, it necessarily follows, considering the circumstances of the instant case, that there are grounds for the application of subsection 163(2) of the Act. The appellant thus knowingly made a false statement in not reporting the total income from his employment with Dunn & Benoît.

I now come to the 1987 taxation year. First of all, counsel for the respondent admitted that the assessment for the 1987 taxation year was made after the normal assessment period provided for in subsection 152(4) of the Income Tax Act. The onus was therefore on the respondent to prove by the weight of evidence that the appellant made a misrepresentation or committed a fraud in filing his return of income. As I have already noted, the documentary evidence for the 1987 taxation year does not, in my view, compare with that filed for 1988. That evidence is particularly weak for 1987. In particular, it is unlikely that the appellant worked the overtime hours implicitly attributed to him for 1987 by the addition of an amount of $10,450 to his income for that same year. I am not altogether convinced by the weight of the evidence that the appellant received any part of his remuneration in cash during the year in question and, consequently, it was not shown to me that it was probable the appellant had made a misrepresentation of facts concerning his employment income from Dunn & Benoît for the 1987 taxation year.

For these reasons, the appeal from the assessment 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 amount of $10,450 must be taken off from the appellant’s income. The assessment of the penalties for 1987 is also set aside.

As to the appeal from the assessment for the 1988 taxation year, it is dismissed in respect of both the tax element and the penalty element.

Appeal allowed in part.