Philippe Veilleux v. Minister of National Revenue, [1985] 2 CTC 2215, 85 DTC 553

Tremblay, TC) [TRANSLATION]:—This appeal was heard on March 20, 1984 in the city of Québec, Québec.

1. The Point at Issue

The issue is whether the appellant, the owner of a machine shop, was justified in not including in his income for the years 1975 to 1979 an amount of some $117,000 covering the five years. The appellant maintained that in 1978, he received from his wife's estate an amount of $93,260 which had been discovered a few days after her death. He claimed that he did not know of its existence before April 1, 1978. He also objected to the payment of penalties amounting to some $6,500 for gross negligence and $792.07 for late returns.

The respondent, who assessed the appellant on a net worth basis, maintained that his assessments were well-founded unless the appellant could prove the contrary.

2. The Burden of Proof

2.01 The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In that judgment, the Court ruled that the facts assumed by the respondent to support the assessment are likewise presumed to be true until proved otherwise. The facts presumed by the respondent in the present case are described in subparagraphs (a) to (h) of paragraph 8 of the respondent's reply to the notice of appeal, as follows:

8. In assessing the appellant for his 1975, 1976, 1977, 1978 and 1979 taxation years, the respondent, the Minister of National Revenue, relied, among other things, on the following facts:

(a) During the taxation years at issue, the appellant operated a business under the name of Atelier de Mécanique P Veilleux Enr;

(b) During these years, the appellant’s entire income was derived from the business Atelier de Mécanique P Veilleux Enr;

(c) For each taxation year at issue, the appellant reported the following income:

YEAR	INCOME REPORTED
1975	$24,454.00
1976	20,856.43
1977	8,867.56
1978	14,877.70
1979	22,216.06

(d) From 31 December 1974 to 31 December 1979, the appellant’s capital rose from $83,659.44 to $212,045.66, as can be seen in greater detail in the appellant's statement of assets and liabilities, which is an integral part of this reply to the Notice of Appeal and is attached as Table A;

(e) In computing his income for each taxation year, the appellant omitted to report income of $22,959.20 in 1975, $23,054.05 in 1976, $22,171.97 in 1977, $23,971.42 in 1978 and $23,822.20 in 1979, as can be seen in greater detail in the appellant’s reconciliation of capital, which is an integral part of this reply to the Notice of Appeal and is attached as Table B;

(f) The appellant was unable to show that all or part of the amounts assessed, following the reconciliation of capital, did not constitute taxable income for the years at issue;

(g) In computing his income for each taxation year at issue, the appellant, knowingly or under circumstances amounting to gross negligence, omitted to report a substantial part of his income, and the following penalties are therefore justified:

YEAR	PENALTY
1975	$1,469.27
1976	$1,452.82
1977	$1,008.92
1978	$1,270.07
1979	$1,451.43

(h) The appellant failed to make a return as and when required for the 1975

and 1976 taxation years, and the following penalties are therefore justified:

YEAR	PENALTY
1975	$419.51
1976	$372.56

3. The Facts

3.01 With regard to the amount of $117,000, counsel for the appellant admitted at the beginning of the hearing that the appellant was contesting only $93,260, that is, the amount he had received from his wife’s estate.

3.02 During examination-in-chief, the appellant testified in this regard that:

(a) On April 27, 1978, his wife Margeuerite Parent died (Exhibit A-1) at the age of 66;

(b) A few days later, he found in the basement in a safe the sum of $93,260, in the following denominations: 398 $100 bills, 274 $50 bills and 1,988 $20 bills;

(c) When he found the safe in a dark room in which linen was stored, he could not open it because he did not known the combination. However, he knew that his wife had purchased this safe from a Lucien Ferland in 1972 or 1973, and he contacted this man, who gave him the combination;

(d) In the early days of the marriage, his wife taxed him with having married her for her money. This accusation was apparently brought on by a telephone call she had received. She was 37 in 1949 when they married, and had not previously worked, but her father was thought to have money. Subsequently, she was always tight-fisted with her money. Nevertheless, in 1954 she apparently provided $1,600 for the purchase of a Car;

During the marriage, she did not go out to work. He gave her money for food (from $30 to $60 a week). He would give her the money at the end of the week, but by Monday there was nothing left. She also kept for herself the family allowance cheques covering the two children;

(e) The marriage contract signed on September 29, 1949 provided for separation as to property. It also contained a mutual wills clause. His wife had made no other testamentary provisions;

(f) After they were married, they lived with his father-in-law for four years. When Mr Parent died in 1953, his wife inherited, but it was ten years before the estate was settled. While they were living with Mr Parent, she was on very good terms with her father. She was his little pet, and got whatever she wanted out of him. It is quite possible that she received cash from him;

(g) On his wife’s birthday, he would give her $50. Her main social activity was to play bingo once a week. She was stingy. She kept the same fur coat all her life;

(h) During the last twenty years of their married life, they slept in separate bedrooms. They never took a trip. There was little communication between them. She was secretive;

(i) The appellant opened his business, the Atelier de Mécanique P Veilleux Enr, in 1951. He apparently invested $7,000 in it;

(j) He generally employed three men and a secretary. He paid everything by cheque.

3.03 Under cross-examination, the appellant testified that:

(a) Upon her father's death, his wife had inherited $6,000 but this amount was apparently given to her by her sister, who, under the will, was the sole heir;

(b) His wife never had access to his business’s cashbox. The latter was never brought to the house. Outside working hours, it remained in the safe in the shop on boulevard Charest. His wife had been to the shop perhaps three times since its opening in 1951;

(c) The $93,260 was deposited in a bank within a few days of its discovery. This amount was revealed by the auditor during the respondent's investigation in 1980;

(d) His wife had one or more bank accounts, but in 1971 or 1972, when banks were required to report interest to the Department of Revenue, she closed them. It was at about that time that she apparently purchased the safe from Lucien Ferland;

(e) From 1951 to 1975, he made no returns. Following an investigation in 1975, he had to pay $23,000 in taxes (federal and provincial);

(f) He himself always worked hard. He went to work early in the morning, and even on Saturdays. He finished paying for the house in 1978.

3.04 In his re-examination, the appellant testified that:

(a) The two children paid their mother for board. They had both been working since about 1972;

(b) The mother kept the family allowances;

(c) Occasionally the mother gave the children gifts or clothing.

3.05 Under re-cross-examination, the appellant testified that:

(a) In the beginning, the business's books were kept by his brother. Later the work was done by an accounting clerk working for the provincial government, who would come to collect the invoices and draw up a list of accounts payable and accounts receivable. The appellant paid himself a salary of $100 a week;

(b) The business’s income was better from 1971 to 1974 than from 1975 to 1980;

(c) In 1975 the net income was $22,500; it dropped to $6,000 in 1977 and went back up to $17,000 in 1979 (Exhibit A-3). In the years prior to 1975, net profits had risen as high as $38,000. Several businesses of the same type as his went bankrupt: Bernier Rousseau, PE Lortie Interdiesel, and so on.

3.06 Mrs Louise Veilleux Grondine, the appellant’s daughter, testified that:

(a) From November 1, 1978, she worked as a secretary for her father's business, answering the telephone, dealing with invoices, petty cash, accounts receivable, and so on;

(b) From 1969 to 1974, she paid her mother for board. At the beginning of 1969, she was paying $15 a week, but in 1974, she was paying $30;

(c) Her mother was very thrifty, and very possessive. She had never heard her parents discuss money;

(d) She did not know of the existence of the safe, and had never even seen it. It was in a cedar closet and she had never been in that closet. She heard about the $93,260 only in 1980, at the time of the investigation by the respondent;

(e) Her mother was a person who did not travel and did not go out, except perhaps once a week to bingo. She knew nothing about finance.

3.07 Jean-Marc McKinnen, an auditor for the respondent since 1974, testified in his examination-in-chief that:

(a) He prepared the reassessments dated August 31, 1981 relating to the appellant for the years at issue;

(b) He did not remember whether the appellant spoke to him during the investigation about the safe or the source of the $93,260;

(c) The appellant apparently mentioned cash amounts of $100 to $500 regularly brought to the house to be “salted away" as savings;

(d) Under the will made in 1947 by Albert Parent, father of the deceased, Mr Parent's entire estate was left to Jeanne Parent Murphy. A will dated 1943 had been in favour rather of the daughter who became the appellant's wife in 1949. After Mr Parent's death in 1953, under an agreement executed before a notary, Mr Lavoie, Jeanne Parent Murphy transferred the sum of $6,015 to Mrs Veilleux in 1958.

3.08 Under cross-examination, Mr McKinnen testified that:

(a) During the audit of the appellant’s books, he found the accounting sytem in order and sufficient for the needs of the business;

(b) During the audit, he spoke with the appellant in the shop;

(c) According to the deposit slip found at the bank, the $93,260 was in the following denominations: 1,988 $20 bills, 274 $50 bills and 398 $100 bills.

3.09 Bernard Ross, an appeals officer for the respondent, testified that:

(a) He made a few minor changes in the auditor’s report;

(b) He met with the appellant, who did not mention the safe but apparently told him that he had inherited from his wife and that the $93,260 could have come from, among other things, the money she had inherited from her father, and money kept back from the amounts he gave her each week.

3.10 In rebuttal, the appellant testified that:

(a) When he spoke with Mr McKinnen in the shop, he was working near noisy machines and Mr McKinnen could easily have misheard.

(b) What he had said to Mr McKinnen was that his wife would have had to steal $100 to $500 a week from him, not something about $100 to $500 cash” and “‘salting away”’.

4. Law — Cases at law — Analysis

4.01 Act

The main provisions of the Income Tax Act involved in this case are sections 3, 9(1), 152(7) and 162(1). They will be cited during the analysis if necessary.

4.02 Case law

The only case to which the Court was referred was Eric Nielson v MNR (33 Tax ABC 257; 63 DTC 811).

4.03 Analysis

To obtain cancellation of the reassessments issued on August 10, 1981 covering the years 1975 to 1979, the appellant had to show that the re- spondent erroneously included $117,000 in his income. The evidence, however, dealt only with the sum of $93,260. The difference between $93,260 and $117,000 must therefore be maintained as income. As for the $93,260, it had to be shown that it should not be included in income, that it came from another source than the appellant’s business, or at least that it existed at December 31, 1974, that is, prior to the period at issue.

4.03.2 The appellant stated under oath that he had found this sum of money in his late wife's safe in April 1978 and that he was heir to it (paras. 3.02(b), (e)). His wife had apparently accumulated it over the years since 1949. It is not easy to prove this. In Court, it is not sufficient to state a fact under oath for it to be considered proven. The best evidence must be adduced. In general, a fact established during testimony must be confirmed in some other manner: by a document, other testimony, or the like, before the Judge can consider the fact to have been proved.

Often, indeed, a witness projects the image that he is not telling the truth, whereas the evidence as a whole (other witnesses, documents) confirms that he is telling the truth. Another witness may project the image that he is telling the truth, but the evidence as a whole shows the contrary. Not necessarily because the witness is lying — on the contrary, he may well believe he is telling the truth, but may be quite mistaken for all that. It is the objective truth that the Court wants to discover. This is why truth in Court cannot depend either on an ignorant person of good will or on a liar who may be a good actor.

4.03.3 In the present case, the very existence of the safe may be questioned. Has the best evidence been adduced? The appellant alone claims to have seen it (para. 3.02(c)). Even his daughter has never seen it (pra. 3.06(d)). He apparently did not say a word about it either to Mr McKinnen (para 3.07(b)) or to Mr Ross (pra 3.09(b)). As a human being, I believe that this safe exists. As a judge, bound by the best evidence rule, however, I do not believe it. The main point here is not the safe, but the $93,260; however, the truth or non-truth of a secondary point can help in judging a witness's credibility.

4.03.4 The appellant's testimony, confirmed by that of his daughter, showed that his wife was tight-fisted (para 3.06(c)). It appears that this may have had its roots in her belief that she had been married for her money (para 3.02(d)). The lack of communication no doubt reinforced this personality trait (para 3.02(h)).

4.03.5 The appellant's testimony, confirmed by that of Mr J M McKinnen, witness for the appellant, showed that the appellant’s wife inherited $6,015 (paras 3.03(a) and 3.07(d)) from her father (para 3.02(f)) in 1958. Because of her thrifty nature, she surely made this money work for her at the bank at least until 1972 (para 3.03(d)).

4.03.6 There is a preponderance of evidence that the appellant’s daughter paid Mrs Veilleux an amount for board ranging from $15 to $30 from 1969 to 1975 (paras 3.04(a) and 3.06(b)).

4.03.7 As to the son’s board, even though the son did not testify to confirm it, the Court believes that there is a preponderance of evidence in favour of this fact, given the mother's nature as already shown and given that the daughter Louise had paid board. It is difficult to believe that the boy would have been exempt from this. Unless I am mistaken, he was younger, he may have begun to pay for board in 1979. As to the amount, we may presume that it was similar to that paid by Louise.

4.03.8 There is also a preponderance of evidence concerning the fact that Mrs Veilleux received and kept the family allowances. The fact that she received them does not need to be proved. It is public knowledge that the cheques are made out to the mother. The fact that she kept them for herself is confirmed by the evidence as to her nature. As to the amounts, there is no evidence.

4.03.9 As to the evidence that Mr Parent gave money to his daughter, the appellant’s wife, early in the marriage, there is no direct evidence. Nevertheless we may deduce that it must be true since in 1953, she provided $1,600 for the purchase of a car. How could she have provided this money if her father had not given it to her? The appellant himself maintained that his wife had never worked — as a wage-earner, that is — either before or after the marriage. He would not have made such a claim if it was false. On the contrary, the reverse would have been more in his favour.

Another factor appears to confirm the likelihood of the gifts from Mr Parent to Mrs Veilleux. Mr Parent knew that his other daughter would benefit from the will he had made in 1947 (para 3.07(d)). It would be normal for him to have shown favour to Mrs Veilleux while he was alive.

Nevertheless no evidence was adduced as to the amounts received. In practice, it was not possible to do so.

4.03.10 The appellant stated that he had given his wife $50 each year as a gift. This is a normal state of affairs. On the other hand, the Court believes that the wife may have used this money for personal expenses. This would also be quite normal in the ordinary course of life.

4.03.11 In practice, since the evidence had to show how much money Mrs Veilleux had at December 31, 1974, there was a preponderance of evidence that she received $6,015 in 1958, that she earned interest on it (para 4.03.5) until 1972; that from 1969 to 1974 in the case of her daughter, and from 1971 to 1974 in the case of her son, she received amounts for board averaging about $20 a week (paras. 4.03.6 and 4.03.7)); that she received the family allowances for the two children (para 4.03.8).

Against this income, it was established that she helped the children, although no amount was stated. The Court believes that the interest accumulated and not substantiated may equal the amounts spent on the children and not substantiated.

The amount of the family allowances can be calculated by the respondent on the basis of the rates then in force.

4.03.12 The reassessments are therefore upheld subject to subtraction of the above amounts (para 4.03.11) and the penalties readjusted accordingly.

5. Conclusion

The appeal is allowed in part and the reassessments referred back to the respondent for reconsideration and reassessment pursuant to the above reasons for judgment.

Appeal allowed in part.