Richard Boileau v. Minister of National Revenue, [1989] 2 CTC 2001, 89 DTC 247

Lamarre Proulx, T.C.J.: —This concerns appeals made by the appellant in respect of the respondent's reassessment of the appellant's 1981 taxation year as well as in respect of the respondent's reassessment of the appellant's 1980, 1982 and 1983 taxation years. As these appeals raise the same issues, they were, by agreement, heard together on common evidence. The Minister of National Revenue reassessed the appellant by calculating his income on a net worth basis. Penalties were also assessed against the appellant under subsection 163(2) of the Income Tax Act.

Net worth assessment

The appellant disputes the amount of $100, which the Minister ascribed to cash on hand on December 31,1979 in the “comparative statement of net worth for the period beginning December 31,1979 and ending December 31, 1983” (the statement). Counsel for the appellant said at the outset of the hearing that he intended to introduce evidence that the amount should have been $30,000, this being a payment received by the appellant pursuant to a separation agreement that he entered into with his estranged wife. Counsel for the appellant said that he would also introduce evidence that a Regis- tered Home Ownership Savings Plan belonging to the appellant and one belonging to his spouse, in the total amount of $15,194.46, were cashed and the money received by the appellant in 1980. There would also be evidence of a $5,000 loan made to the appellant by his estranged wife in 1982 and a further loan of $8,000 made by his common law spouse in October 1983. In addition to these specific figures, evidence would be led regarding the spending habits of the appellant.

The first witness was Mrs. Nancy Boileau, the estranged wife of the appellant. She and the appellant were married on September 10, 1966; they separated on or about September 1, 1979, and entered into a separation agreement on February 29, 1980. She began her testimony by reading paragraph (d) of Article 7 of the separation agreement, as follows:

Each is the owner of a Registered Home Ownership Savings Plan [RHOSP] and that each plan has in it the approximate principal sum of $6,000 plus accrued interest. The wife agrees that upon the husband signing this agreement she shall take immediate steps to terminate her plan and convey the net proceeds from the plan including principal and interest, to her husband. The wife agrees that she shall be responsible for the tax consequences of closing the aforesaid plan.

The evidence showed that in 1980 Mrs. Boileau withdrew her Registered Home Ownership Savings Plan and that the amount was of $7,592.86. This amount was not included in the net worth assessment. Counsel for the respondent stated that the respondent was prepared to concede that the amount was paid by Mrs. Boileau to Mr. Boileau at the time of their separation pursuant to the separation agreement, that. Mr. Boileau received it in 1980, and that this amount should be added to the amount shown under the title "deductions" in the statement. In so far as Mr. Boileau’s own plan was concerned, it was conceded by counsel for the appellant that it had, in fact, been included in the statement.

As a result of the respondent's admission, the discrepancy between the actual income and the reported income becomes nil in 1980 and therefore the penalty of $148.55 which relates to that year would also be nil. It was the Minister's position that because there is no evidence before the Court as to where the funds went, the receipt of these funds did not affect the net worth in the other year. Counsel suggested that if the appellant had testified in order to demonstrate where the funds had gone, and it was shown that they had gone to fund an asset or reduce a liability which does not appear on the net worth, then maybe other adjustments would have to be made. But Counsel submitted that in the absence of any evidence from the appellant to that effect, there are no other adjustments that need to be or should be made.

Counsel for the appellant was of the view that this was not the proper approach, and submitted that appropriate adjustments should be made for the following years as needed. I understand that it was a concession on the Minister’s part. As well, no evidence of a transfer of funds had been put before the Court other than the redemption of the R.H.O.S.P. by the appellant's former wife. However, since the payment would have been made pursuant to the separation agreement, and since the Minister has agreed to include the amount in the statement, I am of the view that not only should the adjustment be made for the year 1980 but that the appropriate adjustments should be made for the subsequent years as needed.

Mrs. Boileau also testified to the effect that she gave the appellant an amount of $30,000 in cash. I quote her:

Richard and I worked out the details of what we were going to do with what we had before we went to a lawyer or before I went to a lawyer. He stated that he would like to have the money that we had accumulated and that I wanted assets. So there was no problem with that whatsoever. That is what we did. I gave him approximately $30,000 in cash and the home ownerships, which was what I considered to be money as well, and I received assets equal to that.

The problem with this testimony is that although the separation agreement specifically mentions the R.H.O.S.P., it does not refer at all to this amount of $30,000. On the contrary, article 7(e) states that "each may dispose of the personal property now possessed by him or her as if he or she were unmarried.” There are two specific and very clear articles in the separation agreement dealing with property. One is article 6 where it is clearly stated that the wife is the owner of the real property. The other is article 7 which discusses personal property at length.

Paragraph (a) of article 7 concerns the furniture, (b) and (c) concern the family cars, (d) the R.H.O.S.P., and (e) (afore cited) the personal property that each had on hand. The witness said that the $30,000 was paid by redeeming Canada Savings Bonds. In support of this, I was shown a letter from the Bank of Canada itemizing bond numbers, par values and redemption dates. Some bonds were shown as redeemed in 1974; some in 1977; some in 1979; and some in 1981. In 1979, the amount redeemed totaled $1,600. This is a far cry from the $30,000 that is supposed to have been paid to the appellant pursuant to the separation agreement. She mentioned in her testimony that through the couple's frugal habits, she was able to amass much money in the form of Canada Savings Bonds and that though she is unable to bring before the Court any better written evidence of the transfer of funds, she did transfer it. As was suggested to me by counsel for the respondent, if an amount of that amplitude had been transferred to her former husband, pursuant to their separation, it would have been part of the separation agreement as were the R.H.O.S.P.s. To be able to accept Mrs. Boileau’s testimony, there is a need for her evidence to be corroborated in some acceptable way. It has not been corroborated in any way whatsoever and in view of this, I have to dismiss that part of her evidence.

Nor can I accept her evidence with respect to the alleged $5,000 loan made by her to Mr. Boileau in the year 1982, as it, too, has not been corroborated in any meaningful manner. The evidence before the Court was merely that of a note in the following terms: "September 1982, Loaned to Richard Boileau, $5,000 Canadian, from Nancy Boileau. To be repaid to Nancy Boileau, when able, without interest.” This document was signed by both parties. The testimony was that this loan was granted in 1982 and repaid before the end of 1983 without any written evidence of these transactions. In any event, the effect of these transactions on the net worth calculation would only be, according to Mr. Berthelot of the Department of National Revenue who prepared the statement, that the net worth discrepancy in 1982 would be reduced by $5,000 but the one of 1983 would be increased by $5,000.

The appellant's common law spouse testified that in 1983 she made a loan of $8,000 to the appellant, taken from a settlement payment received from her first husband. The existence of this loan was not substantiated by any evidence other than the testimony of the witness. Moreover, as the material evidence produced by the respondent, in the form of a purchase of a Canada Savings Bond by the witness in her own name for a similar amount and at the same time, could not be satisfactorily explained by the witness and as her evidence was not as precise as it should have been, I cannot accept this evidence either.

With respect to the quantum of the living expenses assumed in the net worth calculations, although there was evidence as to the appellant's frugal lifestyle, no other amounts were brought forward and the quantum seems to have been acquiesced to by the appellant. The evidence brought by Mr. Berthelot was that he took his figures from an application for a loan made by the appellant. The standard of living assumed by the Minister seems to be acceptable.

At the outset of the hearing, witnesses had been excluded from the courtroom. The appellant did not testify to corroborate the evidence given by his former wife and his common law spouse. I agree with the respondent's counsel that I cannot but infer from that, that the appellant may not have been in a position to corroborate the testimony of these two witnesses. On failure to call a material witness, see Vieczorek et al. v. Piersma et al. (1987), 58 O.R. (2d) 583.

For all the foregoing reasons, I find that the Minister's net worth assessment shall stand except for the consequential adjustments that will have to be made by the inclusion of the amount of $7,592.86 for the taxation year 1980 as previously mentioned.

Penalties

The respondent has assessed penalties against the appellant pursuant to subsection 163(2) of the Income Tax Act. The introductory part of that subsection reads as follows:

Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of. . .

The burden of proof lies with the Minister, as per subsection 163(3), which reads as follows:

Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

The only evidence adduced by the respondent with respect to establishing the facts justifying the imposition of the penalties was that part of the testimony of Mr. Berthelot, an employee of the Department of National Revenue which went as follows:

Q. What was the reason for doing that [net worth analysis]?

A. The reason was, first of all, upon review of his returns and the books and records available, the books and records were not adequate to perform a factual audit. Second, on review of his returns and the information that the RCMP had provided us, it would appear that Mr. Boileau’s net worth would have been higher than the amount of income he had reported.

Q. What was missing from the books and records that made it impossible to proceed by way of a general audit?

A. There were no cash register tapes available. An examination of one of the working papers that is on hand, for a couple of months of the year that we were about to review there were no entries made or anything, for that matter, with regard to the sales. The amount reported by the accountants was, I believe, if I could check my notes, I believe it was in excess of the amounts that they actually showed based on the documents available. There were some inconsistencies with the books and records themselves!

Counsel for the respondent stressed the fact that compared to the rather small amounts that were reported, the amount of the unreported income was quite high, being in excess of $125,000 over four years. She referred me to two decisions of this Court: Coscarella v. M.N.R., [1984] C.T.C. 3067; 85 D.T.C. 3, and Royal Craft Products Ltd. v. M.N.R., [1986] 1 C.T.C. 2290; 86 D.T.C. 1196. In both cases, the Court was satisfied that the Minister had fulfilled the onus of proving the penalties simply by showing that the amount of unreported income was so high that the appellant could not have been unaware of it.

However, in both of those cases, the appellants gave evidence. In the present case, counsel for the appellant chose not to have the appellant appear as a witness. Counsel for the appellant argued that the appellant was on the Court premises, and therefore also at the respondent's disposal, and that to properly discharge his burden of proof under subsection 163(3), the respondent should have called the appellant to testify. By not calling him, should I draw the same negative inference against the respondent that I drew earlier in respect of the appellant not testifying in his own case?

In light of the Supreme Court decision in The Queen v. Wigglesworth, [1987] 2 S.C.R. 541, and that of the Federal Court of Appeal in Amway Corporation v. The Queen, [1987] 1 C.T.C. 97; 27 C.R.R. 305, I believe that a proceeding under subsection 163(2) is of a penal nature. This aspect has already been discussed by Mr. Justice Cattanach in Udell v. M.N.R., [1969] C.T.C. 704; 70 D.T.C. 6019, at page 713 (D.T.C. 6025): "There is no doubt that subsection 56(2) [now s. 163(2)] is a penal section.” It is true that by virtue of subsection 163(2), there is no accused nor is there a criminal charge. It would thus appear that it is not, as such, a criminal proceeding and that it remains a civil proceeding. However, the application of that subsection requires the evidence of mens rea or culpable conduct and for this reason, I believe that the material witnesses are those who were directly involved in the assessment of the penalties and not the taxpayer. Therefore, I do not draw a negative inference from the respondent not having summoned the appellant as a witness.

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).

I am of the view that in the present case, the respondent did not adequately discharge his burden of proof in that he relied almost exclusively on the fact that the appellant was unable to reverse the net worth assessments. In effect, subsection 163(3) requires evidence of the intent or gross negligence of the contravenor. This, in my view, should be done in a structured, clear and convincing manner. I do not find that the evidence was adequate in this respect and therefore, the penalties cannot be maintained.

The appeals are allowed, without costs, and the matter referred back to the Minister for reconsideration and reassessment on the basis afore described.

Appeals allowed.