Mercerie Manic Inc. v. Minister of National Revenue, [1991] 2 CTC 2488, 92 DTC 1116

Tremblay, T.CJ.:—This appeal was heard on common evidence with the appeal of Albert Cloutier (86-1583(IT)) in Quebec City, Quebec, on December 6, 1988. The arguments were heard on January 5 and 6, 1989, in Quebec City, and the case was taken under advisement.

1. Issue

The issue is whether the appellant, a corporation engaged in the retail sale of clothing, was justified in excluding from its calculation of income for the years 1977 through 1983 amounts totalling $130,832.99 that were added by the respondent.

The respondent also imposed penalties in excess of $5,000 for negligence equivalent to gross negligence. The appellant claims that all its business income was duly reported. The amounts deemed additional income by the respondent were apparently advances paid to the appellant by the principal shareholder. The appellant maintains that during the years 1977 through 1982, it received from its sole shareholder, Albert Cloutier, advances totalling $113,510.58 at September 30, 1982, which were used for business purposes.

The appellant further maintains that the notices of reassessment issued on October 26, 1984, pertaining to the years 1977, 1978 and 1979 were issued unlawfully, that is, more than four years after the initial assessments were mailed, the last of them on April 24, 1980.

2. Burden of Proof

2.1 The appellant has the burden of proving that the respondent's assessments are without basis. This burden stems from a number of court decisions, among them the judgment by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; D.T.C. 1182.

2.2 The facts put forward by the respondent are set out in paragraph 8 of the notice of appeal:

[Translation]

8. In reassessing the appellant for the taxation years 1977 through 1983, the Minister of National Revenue relied on the following facts:

a) the appellant was duly incorporated under the Statutes of Québec on April 28, 1976;

b) the appellant's fiscal year ends on September 30 of each year;

c) the appellant is engaged in the retail sale of clothing;

d) the principal shareholder and president of the appellant is Albert Cloutier, who, in addition to his activities in the appellant corporation, was employed by Hydro-Québec in 1977 and 1978;

e) aside from the employment income from Hydro-Québec, unemployment insurance benefits and interest income, Albert Cloutier’s source of income was the appellant;

f) the appellant had no cash register or cash tapes prior to 1980, and all sales invoices for this period have been destroyed;

g) sales paid by credit card or cheque were not included in the income

reported by the appellant; instead the following procedure was used:

1. Albert Cloutier would ask customers who wished to pay by cheque to make the cheque out in his name;

2. similarly, sales paid by credit card would be paid directly to Albert Cloutier;

3. cheques and credit card slips would be deposited in Albert Cloutier's personal account;

4. Albert Cloutier would then withdraw the same money from his personal account and redeposit it in cash in the appellant's account, claiming them as advances from the director;

5. the advances from the director were from additional business income not reported by the appellant and appropriated by Albert Cloutier, and were not Mr Cloutier's personal funds;

h) the additional net business income not reported by the appellant (after deduction of the maximum capital cost allowance) was as follows:

Year	Additional Income
1977	$16,998.97
1978	$40,055.38
1979	$36,840.12
1980	$16,795.28
1981	$12,544.96
1982	$ 7,598.28

i) the appellant's only loss to be deducted in 1983 was a capital loss incurred in previous years;

j) during the taxation years 1977 through 1982, the appellant misrepresented the facts through neglect, carelessness or wilful failure to report its income and tax payable by filing tax returns without reporting the full amount of its business income;

k) in light of the above facts, the penalty under section 163(2) applies more specifically in that:

1. the unreported income was considerable when compared with the net income reported;

2. the principal shareholder appropriated the said unreported income;

3. there was no adequate accounting system.

3. Facts

3.01 In its notice of appeal, the appellant made the following allegations:

1. The appellant was incorporated by letters patent issued under the Companies Act on April 28, 1976, to operate a business engaged in the retail sale of men's clothing;

2. During the taxation years 1977 through 1982, the appellant received from its sole shareholder, various advances totalling $113,510.58 at September 30, 1982, which were used for business purposes;

3. For the taxation years 1977 through 1982, the respondent added to the appellant's income additional income, after additional depreciation, of $16,998.97, $40,055.38, $36,840.12, $16,795.28, $12,544.96 and $7,598.28.

3.02 For the years in question, the appellant reported the following net income:

Year	Date of Assessment	Net Income	Taxable Income
1977	14-08-78	$ 1,075.00	NIL
1978	25-06-79	($27,314.00)	NIL
1979	28-04-80	$ 11,384.00	NIL
1980	04-08-81	$12,750.00	NIL
1981	13-03-82	($ 14,933.00)	NIL
1982	07-02-83	$11,287.00	NIL
1983	01-03-84	$ 18,221.00	NIL

3.03 After an audit was conducted, the respondent issued notices of reassessment on October 26, 1984. The additional unreported income for the years 1977 through 1983 totalled $153,411.99. After a notice of objection was filed, notices of reassessment were issued on June 27, 1986, showing revised income and penalties as follows for the years 1977 through 1982 (1983 was no longer in dispute):

Additional Net

	Income not	Revised Net	Revised Taxable
Year	Reported	Income	Income	Penalty
1977	$16,998.97	$18,073.97	$ 5,242.97	$	760.37
1978	$40,055.38	$12,741.38	$12,741.38	$ 1,596.74
1979	$36,840.12	$48,224.12	$48,224.12	$ 1,331.54
1980	$16,795.28	$29,545.28	$27,157.241 [1]	$ 619.62
1981	$12,544.96	($ 2,388.04	($ 2,388.04)	$	259.03

3.04 The facts submitted as evidence and detailed in the appeal of Albert Cloutier, file 86-1583(IT), are considered to be part of the present documents.

4. Analysis and Conclusion

My analysis of the facts and my conclusions in the Cloutier case apply mutatis mutandis. As it is inappropriate in this appeal to consider Mr. Cloutier's living expenses, the appeal is dismissed on all counts.

5. The appeal is dismissed.

Appeal dismissed.