Paul Jarema and Madeline Stevens Jarema v. Minister of National Revenue., [1992] 2 CTC 2404, 92 DTC 1997

Brulé, T.C.C.J.:— These appeals were heard on common evidence. For Madeline Stevens Jarema her 1985 and 1986 taxation years were involved, and for Paul Jarema the 1984, 1985, 1986 and 1987 years were involved. The Minister in these years assessed and reassessed the appellants on a net worth basis and they are appealing from these assessments. In addition penalties were assessed under subsection 163(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") for both appellants for the years 1985 and 1986, and in the year 1984 as well for Paul Jarema. In addition penalties under subsection 163(2) were levied against Paul Jarema for the year 1987.

Issues

There are four issues involved in these appeals:

1. Where did the funds come from that give rise to added assets and therefore increased net worth amounts for both appellants?

2. What was Paul Jarema's involvement with what was described by the respondent as money-laundering?

3. How did Paul Jarema purchase a house shown on the notary’s transfer as $81,238 for $61,000?

4. What circumstances give rise to the penalties levied against both appellants?

Appellants' position

It was maintained by counsel for the appellants that the basis for the added assets involved were primarily from loans from a Mr. Bowden. The information regarding these loans both by Mrs. Jarema and her spouse was furnished by the appellants to Revenue Canada. These were capital in nature and should not be included as income to increase a net worth statement. After the information was given the subsequent treatment of these loans was arbitrary. Revenue Canada never asked the appellants to prove the loans and no questions were asked until this trial.

As to Mr. Jarema's involvement with so-called money-laundering an explanation was given that the funds belonged to a Mr. Brown and no effort was made to retain these funds when originally seized, and some $20,000 of the $58,000 involved kept by Revenue Canada originally was returned to the appellant thus showing that he was not involved. Therefore this amount should not have been shown on the net worth statement.

With reference to the house purchase it was readily admitted that the notary's contract indicated a price of $80,000 plus some extras but only some $60,000 was paid, the funds largely coming from a loan from Mr. Bowden. The vendor accepted the latter amount as he was in need of funds.

It was suggested that the penalties should not be levied as the appellants co-operated with Revenue Canada requests for returns and information.

Respondent's position

Counsel argued that the burden of proof was on the appellants to show that the net worth assessments were wrong and more was needed than the appellants' stories. No proof was given as to the loans, no proper proof was produced nor corroborating evidence why the amount in the notarial deed involving the house sale was not paid, nor a proper explanation why Mr. Jarema was carrying $78,000 allegedly the property of a Mr. Brown.

While the appellant Mr. Jarema took money from his bank by way of withdrawals he did not say why this should not be considered as income.

There was no excuse for late filings and hence the penalties involving both appellants under subsection 163(1) were proper and also the penalty on Mr. Jarema under subsection 163(2) was correct in the circumstances.

Analysis

These appeals are somewhat out of the ordinary as both sides did not bring forward evidence which may have been helpful to the Court. The appellants gave their explanations to the various items in issue but did not provide corroborating evidence. The lender of the large amounts of money was dead but surely there must be some evidence of the debt to his estate, or the administrator of such, or the latter person giving some evidence. There was no such effort either on behalf of the Minister; a Mr. Miron who was the auditor for Revenue Canada had retired but no indication was given as to his being available to the Court either voluntarily or by way of subpoena. His replacement, a Mr. Belanger, knew very little about the case except what was furnished by the appellants and what was in Mr. Miron's file. He took no positive steps to verify any of the information before the net worth statements were produced. He could not assist in the money stated to belong to Mr. Brown, nor could he help with the house transaction. The notary did not give evidence respecting the house transaction and Mr. Landry, the vendor, did not testify nor was there any evidence that he had been questioned.

This leaves the Court with the best evidence it had at the trial and that was given by the appellants. Their stories were plausible and not put in doubt by cross-examination. Without other evidence I can only conclude that their evidence is not only possible but probable.

With reference to the penalties I do not believe Mr. Jarema made any false statements or omissions and none were shown to be such by the respondent. Therefore he should not be penalized under subsection 163(2) for the 1987 taxation year.

There is no reason why the returns of both appellants were not filed when ordained by the Act and therefore all penalties under subsection 163(1) will remain.

Conclusion

The result is that these appeals are allowed and returned to the Minister for reconsideration and reassessment on the basis that the net worth statements by the Minister have no application, the penalty to Mr. Jarema under subsection 163(2) for the 1987 taxation year be vacated while the penalties under subsection 163(1) imposed on Mrs. Jarema for the 1985 and 1986 years remain and those on Mr. Jarema for the 1984, 1985 and 1986 years remain.

Appeals allowed in part.