Fernand Nadeau v. Minister of National Revenue, [1984] CTC 2214, 84 DTC 1180

Cardin, TCJ [TRANSLATION]:—This is the appeal of Fernand Nadeau from reassessments for the 1976 to 1979 taxation years inclusive.

Summary of Facts

In the taxation years at issue, up to September 1, 1979, the appellant was a self-employed electrician. After September 1, 1979 he became an employee of Les Entreprises d’Electricité Fernand Nadeau Inc.

During the said years, the appellant reported the following income:

On March 17, 1981 the respondent, by reassessments, added to the income reported by the appellant additional amounts calculated by the net worth method as follows:

By the same assessment the respondent, pursuant to subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, imposed penalties in the amount of:

Following a notice of objection the respondent, by reassessments dated March 17, 1981 for 1976 and October 23, 1981 for 1977, 1978 and 1979, reduced the personal expenses previously assessed as follows:

1977 by an amount of $1,679.36 1978 by an amount of $2,070.22 1979 by an amount of $1,694.66

The penalties imposed were also reduced in proportion:

1977 by an amount of $112.23 1978 by an amount of $ 71.97 1979 by an amount of $127.45

In summary, the amounts of income and penalties at issue are therefore:

As appears from the appellant’s statement of assets and liabilities (Appendix 1-1) which is part of the reply to the notice of appeal, the appellant’s net worth rose from $85,755.88 at December 31, 1975 to $192,193.43 at December 31, 1979.

In support of his assessment the respondent submitted that the appellant had provided no valid evidence and given no explanation as to the considerable in- crease in his capital throughout the period of the net worth assessment. The respondent also argued that the assessment of the appellant by the net worth method was the only means of assessing the appellant, in view of the absence of bookkeeping and the lack of any adequate accounting controls in the appellant’s business.

The respondent further argued that the very wide discrepancy existing between reported income and the income which was allegedly earned during the years at issue meant that the income in question was not just a small amount which had been overlooked.

The respondent alleged that these serious omissions in his tax returns and the fact that the appellant kept no significant accounts for his business establish that the appellant knowingly failed to report all his income during the taxation years at issue. He maintained that in the circumstances the penalties imposed by the respondent are justified.

For his part, the appellant argued that the respondent’s assessor relied on incorrect information in his assessment, and the latter was accordingly in error. He alleged that at December 31, 1975 the appellant had accounts receivable amounting to $11,500, which the assessor did not take into account until 1976. He maintained that in 1972-1975 when the appellant was carrying on his trade, there were accounts receivable which the assessor wrongly ignored in his net worth calculation.

In his testimony the Department of National Revenue assessor, Mr Vézina, stated not only that the bookkeeping of the business was inadequate but that, during these years, the appellant wrongly used the cash accounting method rather than the accrual accounting method required in the circumstances.

Since in his cash accounting the appellant kept no record of his employee’s accounts receivable, the assessor in his assessment could not take into account what the appellant now considers to be accounts receivable.

The testimony of the appellant, Mr Nadeau, was vague and imprecise as to the various amounts which he said should have been considered accounts receivable. The arrangement between the appellant and his brother for the building of a house was never fully explained, and it was not possible to determine exactly what the relevance of that amount of $12,000 was to the case at bar.

The wrong alleged by the appellant is, in fact, that by not including accounts receivable the respondent underestimated the appellant’s actual capital at December 31, 1975.

In the circumstances the respondent could hardly have done otherwise, since not only did the appellant have no adequate bookkeeping, he used the wrong accounting method.

Although several questions were put to the appellant in cross-examination, he offered the Court no proof in support of his allegation that the respondent’s assessment by the net worth method was incorrect.

It is unfortunate, but the appellant does not appear to have properly understood or appreciated the importance to him of discharging the burden of proof upon him. It is not enough for the appellant to say that the respondent underestimated his capital at December 31, 1975. The appellant should have presented evidence of the amounts which he thought actually represented his capital at December 31, 1975, and provided the Court with proof of his calculation, which he did not do.

The same is true for the bank accounts opened in his children’s names (Exhibit A-l), which appellant said were not his own income. The question to be answered is not whether it was possible for these amounts to have been gifts from grandparents or amounts which the children themselves earned. It was necessary to determine exactly by means of valid evidence that these moneys had a source other than the appellant’s income, and the appellant did not succeed in doing this. In short, the appellant was unable to establish any of the allegations in his notice of appeal.

The appellant did not show in what way his assessment was in error, and on the evidence presented the Court is of the view that, in circumstances amounting to gross negligence, the appellant failed to report significant amounts of income during 1976-1979 inclusive, and that the penalties imposed are justified.

For these reasons, the appeal is dismissed.

Appeal dismissed.