Ed Sliwa Agencies Ltd, Edward J Sliwa v. Minister of National Revenue, [1984] CTC 2027, 84 DTC 1012

Sarchuk, TCJ:—The appeal of Ed Sliwa Agencies Ltd (the corporate appellant) from assessments to income tax for its 1975, 1976 and 1977 taxation years and of Edward J Sliwa (Sliwa) for his 1974, 1975 and 1976 taxation years were heard together on common evidence in Edmonton, Alberta on November 3, 1983.

The respondent, not satisfied with the income reported by the appellant Sliwa, determined his income on a net worth basis. In this way the respondent ascertained an increase in net worth in each of the years 1974, 1975, 1976 and 1977 and reassessed Mr Sliwa on the new gross income. As well the respondent assessed penalties pursuant to subsection 163(2) of the Income Tax Act.

The income added and the penalties levied were as follows:

The respondent having reassessed the appellant Sliwa in this manner also reassessed the corporate appellant for the taxation years 1975, 1976 and 1977 on the basis that Sliwa was the principal shareholder of the corporate appellant and that during the taxation years in question Sliwa appropriated funds from the corporate appellant which appropriations were not reflected in the T-2 Income Tax Returns and financial records of the corporate appellant. Accordingly the respondent reassessed the corporate appellant as follows:

At the commencement of the appeal counsel for the respondent advised the Court that the notices of reassessment for the appellant Sliwa’s 1974 and 1975 taxation years were issued by the respondent more than four years following the date of mailing of the notice of an original assessment or of the notification that no tax was payable for a taxation year. The same advice was given to the Court in relation to the corporate appellant’s 1975 taxation year.

With respect to these taxation years counsel informed the Court that the respondent would consent to judgment allowing the appeals. The hearing continued in relation to the appellant Sliwa’s 1976 taxation year and the corporate appellant’s 1976 and 1977 taxation years.

In determining the appellant’s Sliwa’s net worth, officers of the respondent prepared an opening balance sheet for the appellant as of December 31, 1973 and a closing balance sheet for each of the years 1974, 1975, 1976 and 1977 (Schedules A-l and A-2 to the minister’s reply to the notice of appeal of the appellant Sliwa). Counsel were able to agree on most of the items and calculations contained in the net worth with certain exceptions.

The appellant Sliwa contends that:

(a) the respondent understated his cash position in the opening balance by approximately $50,000;

(b) while he paid the sum of $37,666.36 in 1974 in respect of income tax assessed against him the source of the funds is in dispute;

(c) although the purchase of a residence at 13820 89th St, Edmonton, for the sum of $97,000 is not in dispute as to the date or cost of the acquisition, the source of the funds is;

(d) the respondent overstated the loan receivable from the corporate appellant by $18,700 which had the effect of increasing the appellant Sliwa’s assets as at December 31, 1977, by that amount.

The appellant concedes that in relation to the increase in net worth of $51,938.49 for the taxation year 1976, the source of $30,000 of that amount cannot be identified.

The appellant Sliwa did not testify. What evidence was adduced came from Mr Clarence E Maimann, a chartered accountant practising in the City of Edmonton. While more recently Mr Maimann has been the accountant for both appellants he was not so engaged during the years in question other than to prepare amended returns for taxation years 1976 and 1977. This was not done until February 1980, Mr Maimann testifying that at that time he attempted to familiarize himself with the taxpayers affairs to the extent possible. He had access to certain, but not all of, the records. He stated that whatever he required to review the files and to prepare financial statements for the corporate appellant was made available. He did concede however that he was never permitted to see the working papers, nor the reconciliations or documents in the possession of the accountant who had originally prepared the income tax returns filed by the appellants.

Mr Maimann testified that in his professional opinion the respondent’s net worth statement could not be accepted for several reasons, and that accordingly the reassessments were not justified. Since the appellants relied exclusively on his testimony their appeals stand or fall on the acceptability of the opinions given by him. The key issues raised can be summarized as follows:

(I) Did the Minister understate the appellant’s cash position in the opening balance by approximately $50,000.00?

Mr Maimann examined the December 31, 1973, net worth statement and stated that in his opinion the cash on hand in the sum of $150 was incorrect and should have been in the neighbourhood of $50,000. He stated that his opinion was based on a net worth prepared by Revenue Canada as of December 31, 1971, (Schedule B to the Minister’s reply) which showed funds in various bank accounts totalling $49,615.13. Mr Maimann also said that Sliwa was taxed on an unexplained withdrawal of $10,000 in 1971 and therefore in his opinion this amount should be added to the total, making funds available to him on December 31, 1971, of approximately $60,000. He suggested that he was able to trace the flow of funds during the period December 31, 1971, and December 31, 1973. To support his position he said that payments on account of income tax due for the taxation year 1971 were made by the appellant Sliwa in 1974. These payments were made by cashing in a $20,000 term deposit and by way of $16,700 deposited in small bills into Sliwa’s current account. Sliwa then drew a cheque in favour of Revenue Canada. Mr Maimann was not able to point to any specific withdrawals of cash from the bank accounts disclosed in the December 31, 1971, net worth statement to support this conclusion but nonetheless continued to maintain that these bank balances must have been the source of the 1974 payment.

On cross-examination Mr Maimann was asked about certain assumptions he made in relation to the bank balances shown in the 1971 net worth statement. He conceded that in relation to an unidentified withdrawal shown in Sliwa’s passbook the proceeds could have been converted to almost any purpose and that he had no knowledge of the use to which those funds were put. As to his testimony that the funds in the various bank accounts as at December 31, 1971, had been converted to cash by Sliwa, Mr Maimann admitted that was no more than an assumption and that he had no personal knowledge that such transactions actually occurred. He conceded as well that prior to 1974 the corporate appellant did not exist and that there were no corporate records to support any of his assumptions. The only documentary evidence produced was one passbook covering the period from 1968 to 1974 (Exhibit R-3). When asked by counsel for the respondent to comment on certain unexplained deposits and withdrawals Mr Maimann stated that he would simply be guessing. He explained he did most of his analysis in 1980 and since that was several years ago he would be unable to give a better response without going back to the records to see if he could refresh his memory. He admitted that he did no analysis of Mr Sliwa’s affairs in 1972 and 1973 and that he simply made the assumption that because certain funds were in Sliwa’s bank accounts in 1971 they became “cash on hand” in the intervening period and were still cash on hand on December 31, 1973. To buttress this assumption he pointed to the fact that Exhibit R-3 was a passbook for an account which permitted cash withdrawals only. This, he said, confirmed his opinion that the amounts withdrawn were converted to cash and held by the appellant until 1974.

In relation to Mr Sliwa’s inventory, which stood at $15,575 as at December 31, 1971, and $47,000 as of December 31, 1973, Mr Maimann was asked whether it was possible that some of the withdrawals during that period of time may have been used to purchase the additional inventory. He responded that such a possibility existed.

On the whole Mr Maimann’s evidence on this issue was unsatisfactory. It would require a quantum leap to proceed from the fact that funds of approximately $50,000 were on deposit to the credit of Sliwa in December 1971 to the conclusion that notwithstanding numerous withdrawals in the intervening period that same amount remained in his possession (albeit in the form of cash on hand) on December 31, 1973. On the evidence before the Court and in the absence of any testimony from the appellant it would be sheer speculation to reach such a conclusion.

(II) The appellant Sliwa submits that in taxation year 1974 he paid the sum of $37,666.36 in income tax and that the source of this payment was not “appropriations” from the corporate appellant but came from “cash on hand” not disclosed by the December 31, 1973, net worth statement prepared by the Minister’s officers.

On this issue the only evidence presented by the appellant was again that of Mr Maimann. His opinion was premised in great measure on two assumptions. It is not in dispute that in 1974 Sliwa paid his 1971 income tax in the sum of $37,666.36. It is a fact as well that Sliwa made a deposit to his personal bank account, by way of a number of bills of small denomination and then wrote a cheque to Revenue Canada for $16,666.36. The witness assumed that this deposit was the cumulative product of bank withdrawals during the previous two years. The remaining $21,000 Mr Maimann assumed came from a term deposit at the Toronto Dominion Bank — Rosslyn Shopping Centre shown on the December 31, 1971, net worth statement. These are flawed assumptions. The list of assets shown on December 31, 1973, net worth statement does not make any reference to a term deposit. There was no evidence tendered that there was any term deposit in existence at that time. There was no evidence from Sliwa, nor from anyone else, that he had cash on hand in any amont greater than $150. There is no evidence at all as to the source of funds used by Sliwa to pay his income tax arrears. There is no evidence upon which the Court could make the unsupported and speculative conclusion suggested by the appellant.

(Ill) Did the Minister overstate the loan receivable from the corporate appellant by approximately $18,700.00?

Mr Maimann testified that at the time the corporate appellant was incorporated certain assets were transferred to it by the appellant Sliwa and the value of these assets became a loan payable to Sliwa. He stated that he reviewed Schedule A-l and various other records available to him and that in his opinion the amount due to Sliwa was $23,377.20 rather than $42,077.99 as calculated by the respondent’s officers. In attempting to explain the difference between these figures Mr Maimann stated that he analyzed the corporate appellant’s records including cancelled cheques and supporting documents and noted a number of personal use items which he then reallocated as payments on the loan to the shareholder Sliwa. Mr Maimann testified that for the 1974 and 1975 taxation years the appellant’s returns were prepared by MacGillivray & Co, and in 1976 and 1977 by a Mr Ron Stroud (a person with some accounting experience who did tax work “on the side”). Mr Maimann examined the returns and statements for the 1976 and 1977 years but maintained that he could not understand Mr Stroud’s figures. He said he endeavoured to relate them to the financial statements but could not. He also said that he did not review the statements prepared for the earlier years but merely assumed that they were correct. When pressed to explain how he arrived at a figure different than that calculated by the respondent’s officers he stated he analyzed the records that were written-up to the extent that he could, given that only certain cheque stubs were marked. He stated that a number of items charged to the corporation were in fact personal items and were now being rewritten on the books to charge them to Sliwa’s shareholders loan. Mr Maimann conceded that there were a number of items where it was necessary for him to make an assumption as to a percentage to be allocated to the shareholder rather than to the corporation. He suggested that even if there was an improper appropriation by the shareholder it was correct to later rewrite the books since personal items were simply recorded improperly.

In essence Mr Maimann’s opinion was that the difference between his recapitulated figures and those originally submitted by the appellants with their income tax returns could largely be attributed to items that were “improperly” charged to the corporation. Mr Maimann was not however able to indicate why the appellants (and their accountant) had treated these items in the manner that they had. He assumed that he could not get Mr Stroud’s work sheets and he did not speak to him, nor did he inquire whether the entries were made on the appellant Sliwa’s instructions or otherwise.

Mr Maimann’s evidence on this issue is also less than satisfactory. It was necessary for him to make retrospective assumptions as to the nature of the expenditures and as to the percentage to be allocated as between the shareholder and the corporation. There is no evidence before the Court to demonstrate in even one instance the validity of such assumptions. Furthermore, the only persons really in a position to explain the allocations as originally submitted in the appellants’ returns, ie the former accountant and Mr Sliwa, did not testify.

It is difficult to accept Mr Maimann’s retrospective analysis on any of the issues, more so upon consideration of the evidence given by the respondent’s witness Mr Hornig, a field audit group head for Revenue Canada, who was responsible for the preparation of the audit and the net worth assessment in this case. It was his evidence that a net worth assessment was necessary because the appellant Sliwa’s records were totally inadequate. They were not orderly and records were missing. Mr Hornig said that in an effort to obtain further records he spoke to the appellant Sliwa but found him to be very uncooperative and very reluctant to supply any information. In relation to the unexplained sum of $30,000 Mr Hornig said that Sliwa could not identify the source.

Mr Hornig was aware of the existence of the net worth statement as at December 31, 1971, and, taking into account the possibility that some of the assets shown therein might still be on hand, he reviewed all items including the cash. It was his opinion that the opening figures in the statement as at December 31, 1973, correctly and accurately reflected the appellant Sliwa’s net worth at that point of time.

It was submitted by both appellants that the Court ought not to find that the source of the increased net worth was undisclosed income appropriated by Sliwa from the corporate appellant. In relation to this submission the Court is, once again, faced with the problem of not having any evidence before it either from the corporate appellant or from Mr Sliwa. He admits, for example, that he cannot account for the sum of $30,000 which formed part of the purchase price of a residence he acquired in 1976. Yet there is not a tittle of evidence of gambling wins (an explanation used in so many instances), no evidence of loans, no evidence of any gifts and no evidence of employment by Sliwa other than with the corporate appellant. Notwithstanding these facts on behalf of the appellants it was baldly asserted that there was no “proof’ that the corporate appellant was the source of these funds and that the reassessment made by the respondent against the corporate appellant was wrong. This submission is not tenable.

The appellants contended that the respondent’s net worth statement is erroneous. The burden of proof is of course on them to show the respondent’s assessments were incorrect. It was incumbent on the appellant Sliwa to show that he had cash on hand in the amount of approximately $60,000 on December 31, 1973, (as he alleged) and it was incumbent upon him to demonstrate that the respondent overstated the loan receivable by $18,700. It was equally incumbent on the corporate appellant to demonstrate that Mr Sliwa did not appropriate funds of Ed Sliwa Agencies Ltd in the relevant taxation years and that such appropriations were not reflected in the income tax return of the corporate appellant. The appellants have failed to meet the onus.

The appeal of the appellant Sliwa in relation to his 1976 taxation year is accordingly dismissed.

The appeals of Ed Sliwa Agencies Ltd in relation to its 1976 and 1977 taxation years are dismissed.

The Minister assessed penalties pursuant to the provisions of subsection 163(2) of the Income Tax Act. The onus of proof is on the Minister when he imposes a penalty. In this case I find that the corporate appellant was the source of the added income in Mr Sliwa’s hands. As for Mr Sliwa the discrepancies between reported and apparent income were so large that they could not possibly have been overlooked. This failure to report income, coupled with failure to keep any adequate bookkeeping system is enough to demonstrate gross negligence by the appellants. The penalties must be maintained.

In relation to Mr Sliwa’s 1974 and 1975 taxation years and to the taxation year 1975 for Ed Sliwa Agencies Ltd the appeals are allowed and the reassessments are referred back to the Minister to be varied by deleting in each instance the increased income and the penalty.

Appeals allowed in part.