Maurice Gagnon v. Minister of National Revenue, [1985] 1 CTC 2126, 85 DTC 140

Cardin, TCJ [TRANSLATION]:—The appellant deducted the following amounts as expenses of hiring a band: $27,922 in 1976, $33,650 in 1977 and $29,200 in 1978.

In a notice of assessment, the respondent allowed one half the amounts claimed. He therefore disallowed the following amounts:

The respondent alleged that no evidence was produced that would justify the expenses disallowed, and those that were allowed were only partially supported by evidence. The respondent submitted that the appellant did not show that the amounts disallowed had been incurred for the purpose of earning income from his hotel business. The respondent contended that he was justified in deducting these amounts from the appellant’s income for the taxation years 1976 to 1978.

Summary of Facts

The appellant operates a hotel under the name of Villa Saguenay Enr (Hotel). The hotel has forty-three rooms which are rented mainly during the summer season. About 80 per cent of the income from this business comes from the operation of the hotel bar. There was a dance floor in the bar and a platform for giving shows. It is alleged that during the years in question, before discothèques became so popular, dance bands were a major means of attracting a large clientele and generating maximum income from the bar. The cost of hiring bands was between $400 and $600 per week.

The bands were generally hired through an agency operating under the name of G D Musical, managed by Mr Guy Demeule. The bands were supposed to be hired under contracts signed by the appellant and the agency that hired them. However, no contract was produced in evidence by the appellant or the agency, because, it was said, the bands had usually finished their engagement before the contracts had been signed.

With regard to the method of payment, the appellant generally paid the bands by cheques which were cashed at the hotel. Occasionally, the band paid a ten per cent commission directly to the agency; at other times, the appellant allegedly withheld the commission from the band members’ pay and paid it directly to Mr Demeule.

Exhibit A-2 shows a series of cheques paid directly to the band in 1976, 1976 and 1977. In 1978, the year in question, the appellant stopped hiring bands, and there are no cheques for this year.

The appellant’s accountant, Mr Robert Tremblay, filed as Exhibit A-l financial statements for the Hotel Villa Saguenay Enr for 1975-1979 inclusive and stated that the bands substantially increased the hotel’s income. He confirmed that they were paid by cheque, and that the cheques were endorsed and cashed at the hotel.

Mr Guy Demeule testified that between 1975 and 1978, he had hired a number of bands for the appellant and that his commission was ten per cent of the amount paid to the musicians in the band. Calendars marked Exhibit A-3 were filed for 1976 to 1978. They were supposed to indicate the bands that Mr Demeule had scheduled to play in the appellant’s hotel. Mr Demeule said that he had kept no copy of the contracts under which the players were hired.

Mr Denis Lessard, a Department of National Revenue auditor since 1974, stated that he had begun auditing the appellant’s hotel accounts in 1980 in connection with a disposition by the appellant of one of his properties. It appears, however, that during the 1980 audit, Mr Lessard had difficulty obtaining the relevant documents relating to the operation of the hotel. The auditor was unable to obtain copies of the contracts or the records of the cancelled cheques made out to the players which the appellant said he had cashed for them. Mr Lessard testified that the Department of National Revenue had previously audited the appellant’s books. Between 1972 and 1974, Mr Jacob, a departmental auditor at the time, had audited the books and records of the appellant’s hotel. On this first occasion, the same problem had occurred. The appellant followed the same procedure for hiring the bands that he used later in 1976, 1977 and 1978. However, after finding no contracts, Mr Jacob informed the appellant of the importance of keeping such contracts for tax purposes. The artists were paid as the appellant and Mr Demeule said, that is, by cheques which were cashed by the payees at the hotel. However, the respondent alleged that these contracts specified the amount of the artists’ salary and the deductions made for room and board. This assertion is supported by the proposed assessment, dated April 16, 1980, which was sent as a letter to the appellant and brought to the attention of Mr Tremblay, an accountant.

On page 3 of Exhibit I-3, which concerns the respondent’s proposed readjustments to the appellant’s assessment, under the heading of unreported income, which is of particular interest to us, we see the following:

Summary of proposed readjustments

Unreported income:

This letter notwithstanding, it has not been possible to obtain from the appellant or Mr Demeule a copy of the contracts and no statement or document was produced concerning room and board expenses for members of the various bands hired to play at the hotel, which were included in the appellant’s assessment.

The schedule of bands hired by the hotel, filed as Exhibit A-3 by the appellant, was not shown to Mr Lessard during the 1980 audit, although he had asked Mr Demeule to show him all documents relating to the hotel’s hiring of bands.

The appellant failed to meet the burden of proof of showing that all the band expenses which he had claimed had been incurred for the purpose of earning a profit from his hotel. There is no doubt that the appellant had hired bands during the years in question, and it is acknowledged that the bands made a substantial contribution to the hotel’s income, but that is not the problem. What is in dispute is the exact amount that the appellant spent in hiring the bands in 1976, 1977 and 1978.

There are four main reasons why the appeal must be dismissed:

1. Although the appellant had been warned at the time of the first assessment for the years 1972 to 1974 of the importance of saving copies of contracts with the agency or the various bands, he did not produce any such contracts or even a copy of a contract when Mr Lessard carried out the 1980 audit.

2. Although the appellant knew he would have to provide sufficient evidence to substantiate expenses, he did not provide evidence to establish even so much as half the expenses claimed.

3. The appellant and Mr Demeule failed to provide details regarding the band contracts and they did not co-operate in providing Mr Lessard with other relevant data during his audit.

4. The credibility of the appellant and Mr Demeule was challenged with regard to the musicians’ payments for room and board in an allegation by the respondent in Exhibit A-3, and the appellant failed to rebut the allegation.

The appellant was not able to show that the amounts of $13,961, $16,825 and $14,600, or half the expenses claimed, were incurred for the purpose of earning a profit from the operation of his hotel. The respondent accordingly did not err in including these amounts in the income of the appellant for the taxation years 1976, 1977 and 1978 respectively.

The appeal is dismissed.

Appeal dismissed.