Erroca Enterprises Limited v. Minister of National Revenue, [1986] 2 CTC 2425, 86 DTC 1821

Couture, C.J.T.C.:—The appellant is appealing an assessment regarding its 1983 taxation year, in respect of which the respondent levied a late filing penalty in the amount of $1,188.96.

The facts upon which the respondent relied to impose this penalty are fairly simple and the validity of the appeal rests exclusively on the degree of credibility that the Court is prepared to give to the testimony of the witnesses. No question of law is involved.

The first witness on behalf of the appellant was the company’s auditor, Mr. Frederick John Stille, C.A. He is a member of the Institute of Chartered Accountants, has served as a member of the Discipline Committee of the Institute and also on the Inter-Provincial Committee for Uniform Rules and Ethics. At the time of the hearing he had been the appellant’s auditor since 1981, and also auditor of four affiliated companies.

He explained that the appellant was one of a group of five companies whose shares were all wholly owned by the same shareholder, Mr. Andrew Coffee, their president. Since his appointment as auditor of the companies he had prepared their financial statements together with their federal and provincial (Ontario) corporate income tax returns. The names of the companies are: Erroca Enterprises Limited (the Appellant), Andrew Coffee Holdings Limited, 502066 Ontario Limited, 529880 Ontario Limited and Andrew Coffee Grounds Limited. The year end of each company was April 30.

Mr. Stille said that his practice in dealing with these clients while their auditor, and up to June 1983, was that once their financial statements and income tax returns were completed he would meet with the companies’ president, discuss the contents thereof with him and then Mr. Coffee would sign them in from of him. The returns were left with Mr. Coffee for mailing.

In so far as the returns for the 1983 taxation year were concerned, according to his diary he met with Mr. Coffee on June 28, 1983 and also according to his recollection the same procedure as described above was followed. The last day for the companies to file their returns for 1983 in accordance with the provisions of paragraph 150(1)(a) was October 31, 1983. In the case of Andrew Coffee Grounds Limited, since the company as involved in a joint venture with another taxpayer and the auditors of this venture were accountants of Toronto, Mr. Stille had to wait for the financial statements of the joint venture to prepare the financial statements and income tax returns of that company. Its return was filed within the prescribed statutory date and an assessment was issued on December 5, 1983.

On July 7, 1983 he submitted a statment of account to the appellant for professional services rendered to June 26, 1983 regarding the preparation of the companies’ financial statements and related corporate income tax returns for 1983. Mr. Stille testified that in February 1984 he received from the office of Mr. Coffee a copy of a letter referred to as a formal demand, dated February 14, from Revenue Canada requesting that Andrew Coffee Holdings Limited file its income tax return for the taxation year 1983. Satisfied that this return had been filed already he instructed someone on his staff to inquire at Revenue Canada about the tax returns of all the companies. A phone call to the local office revealed that none of the four companies' returns, allegedly mailed on June 28, 1983, had been assessed as of February 22, 1984. In compliance with the "demand" from Revenue Canada, with regard to Andrew Coffee Holdings Limited, he forwarded, with a covering letter dated February 22, 1984, a copy of its tax return for 1983 together with copies of the tax returns of the other four companies which, of course, included the appellant’s return. It was eventually alleged by Revenue Canada that the original income tax returns of the four companies purported to have been mailed on June 28, 1983, on behalf of the appellant, had never been received by Revenue Canada.

It was also stated by the witness that in addition to the request from Revenue Canada to file a return for Andrew Coffee Holdings Limited, that the Department of Revenue of Ontario demanded a return for each of these four companies.

He mentioned that in June 1983 the appellant was healthy financially. In fact its balance sheet as of the 30th of April 1983 indicates current assets in the amount of $885,246, which amount included cash on hand of $24,441 and term deposits of $226,582 against current liabilities of $425,626 with no long term liabilities. The shareholders equity was shown at $725,039. Mr. Stille insisted that since he had been the auditor of the appellant there were never any problems whatsoever with either Revenue Canada or the Department of Revenue of Ontario, and this was also the situation with respect to the other companies.

The assessment raised by the respondent showed a balance unpaid of $17,226.20 which amount included the penalty of $1,188.96, a liability that would not have affected the appellant materially.

The second witness for the appellant was its president, Andrew Coffee, who testified that he had been in business in Thunder Bay for over 30 years, during 20 of which he ran his personal business of men’s wear retailing. He is the sole shareholder of all the five companies referred to before. He confirmed that he or his companies never had any difficulties whatsoever with Revenue Canada or the Department of Revenue of Ontario since he has been in business. The bookkeeping for the companies and the day to day clerical work is looked after by an office manager, a Mrs. Whiteman who has been a faithful employee for approximately 18 years.

His handling of the corporate outgoing mail is relatively simple. After signing it, he places it on top of a photocopier located outside his office next to Mrs. Whiteman’s office or remits it directly to her and she attends to actual mailing of all the companies’ outgoing mail. This practice has been followed for as long as he could remember. He corroborated Mr. Stille’s evidence as to the procedure with regard to the companies’ income tax returns. After being informed that the 1983 tax returns had not been apparently received by Revenue Canada he conducted a search of his office and nothing was found and those returns have never turned up. Ever since that experience all companies’ income tax returns are now mailed through the office of Mr. Stille.

The next witness for the appellant was Mrs. Whiteman who gave a short description of her duties as office manager. They include general bookkeeping for all the stores, four altogether, which duties include also cheque writing, balancing cash and general office work.

As mentioned before she also attends to the actual mailing of all outgoing mail. She confirmed the procedure described by Mr. Coffee in so far as his handling of his mail is concerned. It goes out daily. She normally deposits it in a post office box downtown or sometimes she takes it directly to the Fort William post office. She explained also that in the past they had a few problems with the post office and at one time a whole month’s billings were lost and never located again.

She admitted that she had mailed a number of income tax returns in the past and prior to 1983 there were never any problems with respect to these returns. She stated that she could not actually remember where the 1983 returns were effectively mailed, in June 1983, that is whether they were deposited in a post box downtown or at the post office itself. When she was informed that the 1983 income tax returns of the companies had not been received by Revenue Canada, she conducted a thorough search of her office to ascertain that they would not have: been misplaced by mistake, but nothing was found and as of the date of the hearing they had not been located.

It is obvious that the outcome of this appeal rests entirely on a question of credibility. If the Court accepts the evidence of the witnesses who have testified on behalf of the appellant, the appeal must be allowed, if not it must be dismissed.

Reviewing briefly the facts as they were related by these witnesses, there is no doubt that the appellant’s income tax returns for 1983 were prepared by the company's auditors and were signed in the presence of the senior partner of the auditing firm, Mr. F. J. Stille, C.A. who impressed me as a highly competent accountant, whose evidence I accept without hesitation.

Mr. Andrew Coffee, president of the appellant is a successful businessman of long experience. I was also impressed by his demeanour as a witness and his answers to the questions addressed to him by counsel for the appellant and respondent. He volunteered a comment in the course of his testimony to the effect that neither he nor the appellant had anything to gain by delaying or withholding the filing of those federal and provincial income tax returns in June 1983. Admittedly there were no apparent reasons for such an action. The witness' comment taken in isolation is more self-serving than of probative value. However, when considered in the context of all the evidence, it does constitute one more element in the sequence of the circumstantial evidence that must be appreciated to arrive at a decision. The appellant was at the time, according to the evidence, in a very healthy financial position having a substantial amount of cash on hand. In addition, throughout his and its business career, neither Mr. Coffee nor the appellant have ever experienced a filing problem with Revenue Canada or the Department of Revenue of Ontario. Relying on the office manager to attend to the actual mailing of all outgoing mail is a normal and acceptabe practice. In the ordinary course one would not expect the president of a corporation, whether its operations be modest or substantial, to cope personally with the corporate mail.

In so far as the third witness is concerned, Mrs. Whiteman, office manager of the appellant, an employee of nearly 20 years in the service of Mr. Coffee or the appellant, highly efficient according to Mr. Coffee the Court finds her evidence convincing. She admitted recalling mailing a number of income tax returns over the years and never encountered any problems. She candidly admitted that in December 1985 she could not remember actually mailing the returns in question in June 1983, but she was satisfied based on the practice and procedure that she followed over the years with respect to Mr. Coffee's outgoing correpondence that these returns had been mailed. A thorough search of her office and the office of Mr. Coffee, after they were informed that Revenue Canada had never received these returns confirmed at least that they had not been misplaced within these rooms.

Admittedly there was no direct evidence as to the actual mailing of the said returns, but the fact that the returns had been prepared and signed, confirmed by Mr. Stille, that the appellant and its president had never been late prior to the experience of 1983, and also the long established practice in dealing with the mail as described by Mr. Coffee and reaffirmed by Mrs. Whiteman carry much weight in appreciating the plausibility of the evidence adduced by these two witnesses.

For these reasons the Court accepts their respective version of what occurred on the 28th of June, 1983 with respect to these returns, and on the balance of probabilities agrees with them that they were mailed within the prescribed time provided by paragraph 150(1)(a) of the Act. What happened to these returns afterward is not for the Court to speculate. Consequently, the appeal is allowed and the penalty levied by the respondent should be cancelled.

Counsel for the respondent submitted, with regard to costs, that in the event that the appeal be allowed the appellant should not be granted its costs because had it provided any kind of evidence to the appeal officer of Revenue Canada leading to the fact that the returns had been mailed the case would not have been brought before this Court. The Court was left somewhat perplexed by this submission in the light of the evidence that was presented in the course of the hearing.

It was obviously impossible for the appellant to prove the actual mailing of the income tax returns in question. What evidence or additional evidence was expected by the appeal officer to convince him of the validity of the appellant’s contention is difficult to imagine. Maybe photographs showing Mr. Stille preparing the returns, one showing Mr. Coffee signing them and finally a third one showing Mrs. Whiteman at the post office in the process of mailing them might have shaken his hesitation in affording the witnesses the credibility they were entitled to.

A number of questions were directed to the appellant’s witnesses by counsel for the respondent regarding whether a cheque had been issued in payment of the outstanding tax liability at the time the returns were signed. Apparently no such cheque was issued because as explained by Mr. Coffee the appellant normally paid the tax upon receipt of the assessment. Even if such a cheque had been issued at that time it could not have added much weight as to whether or not the returns had been mailed, which is the only question to be resolved in this appeal. The Court fails to understand the relevancy of the existence or not of a cheque in support of a conclusion as to whether or not the returns in question had been mailed.

It is, therefore, the decision of the Court that the appellant did not withhold any information that could have assisted the appeal officer to reach a different decision in respect to this appeal.

The appellant is entitled to his party and party costs.

Appeal Allowed.