William D. Stirton v. Minister of National Revenue, [1988] 1 CTC 2298, 88 DTC 1205

Brulé, T.C.J.: —

Issue

The present appeals were heard in London, Ontario, on November 18, 1987, with respect to the appellant's reassessments for the 1972 to 1980 taxation years inclusive. The appellant’s appeals were initially based on the Minister of National Revenue's refusal to deduct certain mortgage, property tax and travelling expenses incurred by the appellant in the course of his horse-training business. The appellant also claimed that the Minister erred in his calculation of the capital cost allowance of some of the appellant's assets and in the levy of penalties for late filing of income tax returns for the taxation years 1973 to 1978 inclusively.

At the hearing the appellant agreed to abandon his pretentions regarding the calculation of the capital cost allowance and the deductibility of his travelling expenses. Furthermore, the parties agreed that the amount of adjustments agreed upon on April 3, 1984, should be increased by the amount of $625 per year for the taxation years 1972 to 1975 inclusively (see Exhibit "A"). Accordingly, the only issues remaining to be decided in these appeals relate to the deductibility of the mortgage and property tax expenses of the appellant and the levy by the Minister of penalties for the late filing of income tax returns.

Facts

In his testimony the appellant gave evidence that throughout the years material to these appeals he was the owner, trainer and driver of standard- bred racehorses. His business was conducted on a horse farm, started in 1969, where he had his own training track and facilities for boarding horses.

In filing his tax returns for the taxation years 1972 to 1975 inclusively the appellant claimed a deduction of all his mortgage and property tax expenses as follows:

The portion of "the expenses claimed" that was allowed as deductible expenses, represented 25 per cent of the total value of each of the expenses claimed per year. This percentage was to account for what was apportioned by the Minister on the basis that 75 per cent of the appellant's house was allocated for his personal use, while only 25 per cent was used for a business purpose.

Sometime in 1975 or 1976 the appellant sold his house located in the town of Orangeville, Ontario, to move to his horse-training farm outside of the town of Orangeville.

For the Minister Mr. Donald O'Bright, an accountant-auditor with the Special Investigation Branch of the Department of National Revenue, testified that from 1972 to 1975 he was responsible for the investigation of the appellant's case. He stated that the Department's first letter to the appellant dated November 13, 1973, was a request to file a return for the 1972 taxation year. Apparently, this request was subsequently complied with by the appellant. On October 20, 1975, another letter was sent to the appellant requesting the filing of his 1974 tax return. This time no answer was forwarded. On November 10, 1976, a similar letter was sent to the appellant requesting the filing of his 1975 tax return. In reply Mr. O'Bright received a profit and loss statement which was filed in lieu of the standard tax forms.

According to Mr. O'Bright it was the lack of precision (e.g. no itemization of income source, amounts quoted were estimates rather than accurate figures) of the appellant's statement of profits and losses that triggered the Special Investigation Branch to begin an audit of the appellant's affairs in the spring of 1976. At that time a request was made to the appellant to supply cash receipts, duplicate deposit slips and expense freight slips. In a document dated April 1, 1976, the appellant acknowledged receipt of this request and sent on July 15, 1976, various records, viz. cancelled cheques, monthly bank statements, etc.

As the records sent by the appellant were found to be insufficient, two other letters were written concerning the receipts and slips previously requested. One letter dated July 22, 1976, was left unanswered. Another letter dated January 27, 1977, was answered by the appellant in a letter dated February 18, 1977. In his letter the appellant wrote to confirm that all his records had already been sent to the Special Investigation Branch on July 15, 1976. During a seizure performed on July 12,1977, Mr. O'Bright testified that miscellaneous invoices, house accounts and cancelled cheques covering the years 1972 to 1975 inclusively were taken. Following this seizure the Special Investigation Branch proceeded to reconstruct the appellant's records notably by interviewing friends and clients of the appellant. Although Mr. O'Bright was not personally involved in the actual reconstruction of the appellant's records, he was of the view that with only three sources of income (i.e. purse winnings, training income and hay harvesting) it would not have been complicated for the appellant to prepare a schedule of itemized sources of income similar to the Schedule prepared by the Special Investigation Branch and filed as Exhibit R-2.

During his cross-examination Mr. O'Bright was questioned on the Special Investigation Branch's need of information beyond what the appellant had submitted on July 15, 1976. Mr. O’Bright’s answer was that in this case additional information revealed important discrepancies shown in a schedule entitled "Comparison of Revised Farm Income & Expense" filed as Exhibit R-1.

Also called as witnesses by counsel for the respondent were Mr. Herbert Goodbrand, investigator at the Special Investigation Branch in Kitchener, and Mr. Littlefield, accountant with Revenue Canada. Mr. Goodbrand testified that, at the time (1981) he was commissioned to conduct an audit of the appellant's business and he was made aware of the Branch's requests of records to the appellant. During the audit it was found that the appellant's records for 1972 to 1975 were incomplete. On the other hand, there was no problem in getting the appellant's records for 1976 to 1980. Mr. Littlefield, who was the appeals officer at the material time the appellant was reassessed for the taxation years 1972 to 1980 inclusively, gave evidence that even on unvouchered items the appellant was given some of the benefits he was claiming. For example, the appellant was allowed to deduct 25 per cent of the mortgage payments made on his Orangeville house. Similarly, 70 per cent of his property taxes were allowed, the remaining 30 per cent was deemed to be used for personal purposes.

As for penalties, Mr. Littlefield filed Exhibit "B" included in the reply to notice of appeal which shows the appellant's penalties for late filing as follows:

Mr. Littlefield explained that the amounts subject to penalty under federal statutes were calculated pursuant to subsection 163(2) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended (the Act).

Appellant's Argument

It is the appellant's position that the discrepancies between the amounts he had reported and the amounts determined by the Special Investigation Branch "were all minor in the long run" and that in the present case an investigation of his affairs was not called for. Further, the appellant added that throughout the investigation both he and his wife received complaints of harassment from friends and clients.

In the appellant's view his only fault was poor bookkeeping of his records, not negligence.

Minister's Argument

Counsel for the Minister submitted that whether or not the appellant was negligent in filing his tax returns is a question of fact. In this case, counsel argued, there is no doubt that the appellant's negligence is established by evidence of improper bookkeeping and numerous unanswered requests to forward his records and his tax returns.

Counsel argued that it would have been easy for the appellant to "go out and get details" instead of ignoring the requests made to him. It was because of the appellant's negligence, counsel contended, that Revenue Canada was forced to incur the expense of going out and seeking the pertinent information itself. Under this country's system of collection of taxes, counsel concluded, the appellant had an obligation to keep records and properly file his tax returns. The evidence produced in this case shows that the appellant failed to honour this obligation and that no reasonable excuse was offered in his defence.

Analysis

Having reviewed the whole of the evidence, I find that there is no compelling reason to infirm the Minister’s reassessment regarding the appellant's mortgage and property tax payments. I have reached this conclusion in view of the largely uncontradicted evidence presented at the hearing by counsel for the Minister.

Concerning the second ground of appeal, the levy of penalties for the late filing of the appellant's tax returns for the 1973 to 1978 taxation years inclusively, it is clear as I read subparagraph 152(4)(a)(i) in connection with subsections 163(2) and (3) that before the Minister may be allowed to reassess a taxpayer beyond the period of four years from the date of initial assessment the Minister has the burden of proving that the misrepresentation of the taxpayer is attributable "to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act".

The requirements of the Minister's burden under subsections 163(2) and (3) were recently summarized by Judge Rip of this Court in the case of Fortis et al. v. M.N.R., [1986] 2 C.T.C. 2378 at 2384; 86 D.T.C. 1795 at 1800:

In assessing a penalty under subsection 163(2) the Minister has to determine the amount of income the taxpayer failed to report and establish the circumstances surrounding the unreported income. The Minister must show a taxpayer has failed to report income so the Court can determine whether any particular penalty was in an amount authorized by subsection 163(2). See Elchuk v. M.N.R., [1970] C.T.C. 326 at 329; 70 D.T.C. 6235 at 6237.

and at page 2385 (D.T.C. 1801) he went on to say:

Subsection 163(3) imposes on the Minister the onus of establishing the facts justifying the assessment of the penalty under subsections 163(1) or (2). The onus on the Minister in respect of the penalty should be no different from the onus placed on a taxpayer who appeals from an assessment of tax. Consequently when a taxpayer appeals an assessment of the penalty, the Minister must establish on a balance of probabilities the facts justifying the assessment. A fact which must be established is the understatement of an income for the year since the amount of additional tax on which the penalty is calculated can only be determined once the understatement of income for the year is known. [re. The Queen v. W. Taylor, [1984] C.T.C. 436; 84 D.T.C. 6459 (F.C.T.D.)].

In the present case I am satisfied that the Minister has established on a balance of probabilities the facts on which the appellant’s reassessments rested as well as the facts justifying the assessment of penalties under subsection 163(2). In my opinion, the basis of the Minister's adjustments was convincingly proven by the testimony of Messrs. O’Bright, Coodbrand and Littlefield, and I take their evidence as painting an accurate picture of the appellant’s business situation. Similarly, I agree with counsel for the Minister that the appellant was negligent with respect to the requests for records made to him by Revenue Canada and that, in the circumstances, alleging poor bookkeeping practices is no excuse.

Disposition of the Appeals

With reference to the agreement reached by the parties at the hearing, it is ordered that the matter be referred back to the respondent for reassessment on the basis that an amount of $625 per year be added to the allowable amounts of adjustments for the taxation years 1972 to 1975 inclusively. As for the appeals in respect to the mortgage and property tax payments and the levy of penalties, they are dismissed for the above stated reasons.

There will be no costs allowed.

Appeals dismissed.