Malcolm Gadway v. Minister of National Revenue, [1984] CTC 2648, 84 DTC 1559

Cardin, TCJ:—Malcolm Gadway is appealing from an amount of tax based on the appellant’s net worth for the 1977, 1978 and 1979 taxation years.

By notice of assessment dated August 31, 1981, the Minister of National Revenue added as unreported income amounts of $31,333.53, $23,125.95 and $6,404.31 to the appellant’s income and levied, pursuant to subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, penalties of $1,521.56, $1,427.22 and $310.02 for the 1977, 1978 and 1979 taxation years respectively.

As a result of a normal audit of the appellant in September 1981, Mr Cauley, an auditor for the Minister of National Revenue found that the appellant deposited, inter alia a cash amount of $20,000 on October 20, 1977; a further amount of $20,000 on May 2, 1974 and an amount of $5,300 on June 17, 1979 in his savings account No 2316, Bank of Nova Scotia in Wilberforce, Ontario (Exhibits A-5, A-6 and A-11).

Mr Cauley proceeded to compute the appellant’s taxable income on a net- worth basis taking into account the appellant’s assets, his liabilities and his personal expenses as set out in the statement of comparative net worth attached to the Minister’s reply to notice of appeal as Annex A.

There is no dispute as to the facts. The two points of contention are: the amount of cash the appellant had on hand at the end of the 1976, 1977, 1978 and 1979 taxation years as well as the source and taxability of these amounts, and the amount of the appellant’s personal expenses for each of those years. The Court must also decide whether the penalties levied by the Minister are justified.

The appellant is 35 years old and single. Since 1964 he was employed on a part-time basis in his uncle’s business “Chester Schwandt and Building Supplies Limited’’, earning between $1,000 and $2,000 a year. After 1969, he worked on a full-time basis and in the years under review his salary income was roughly $8,000 a year. In 1977, the appellant acquired shares in his uncle’s company. In 1970, after his mother’s divorce, the appellant lived with his uncle and aunt, Mr & Mrs Chester Schwandt, and was not required to pay board or lodging but rendered services to them instead.

During the years from 1964 to 1970, the appellant claims to have earned $42,000 and although he paid his university tuition with part of his earnings, he claims to have saved $20,000 which he kept in a safe in his uncle’s house.

The various sources of the appellant’s income other than his salary is the sale of cattle and pigs during the period of 1970 to 1975, from which he alleges to have earned $5,000. Although the appellant’s uncle testified that the appellant did raise and sell cattle and hogs, he was unable to say the amount earned from that source, nor did the appellant report any income from the sale of animals. A second source of income which the appellant alleges to have had was the sale of a coin collection whose fair market value at the end of 1976 was $4,000 but profit on the sale was not reported in the appellant’s tax returns.

Other than relatively small amounts received from his grandmother’s will (Exhibit A-4), his grandfather and from his mother’s divorce for a total of $1,720, the appellant contends that the major portion of his earnings was from horserace betting and gambling from the time he was 16 years old. The appellant estimated his earnings from horse racing up to 1976 to be $25,000. He also produced (Exhibit A-l) hotel bills in Las Vegas where he claims to have won some $4,500 in 1977. This amount of winnings in Las Vegas in 1977 was confirmed by Mr Arthur Dawson, who travelled with the appellant to Las Vegas and actually saw the appellant exchange his chips and count earnings of $4,500.

At the request of the Minister of National Revenue in 1981, the appellant had a statement of his net worth prepared for the pertinent taxation years. The appellant’s net worth statement indicates that the amount of cash on hand on December 31, 1976 was $40,000; on December 31, 1977 cash on hand was $21,500, on December 31, 1978 it was $14,000; on December 31, 1977 cash on hand was $21,500, on December 31, 1978 it was $14,500 and on December 31, 1979 it was $8,400. The appellant’s net worth, according to his own comparative net worth statement, was $56,721 on December 31, 1976; $64,918 on December 31, 1977; $83,263 on December 31, 1978 and $85,091 on December 31, 1979.

The appellant did not disagree with the respondent’s calculation of his net worth appearing as Annex A attached to the Minister’s reply to notice of appeal and filed as Exhibits R-l and R-2. In his comparative net worth statement, the respondent established the appellant’s net worth on December 31, 1976 at $15,293, for 1977 a net worth of $44,885, for 1978 a net worth of $66,961.51 and for December 31, 1979, a net worth of $69,343.70.

What the appellant disagreed with was the amount by which his net worth was increased as a result of the respondent’s inclusion of additional earnings in his net-worth assessment.

The appellant also disagrees with the amount of figures used by the respondent in calculating his personal expenditures for each of the years 1977, 1978 and 1979 which, together, resulted in what the respondent alleges in his assessment is unreported taxable income of $31,333.53, $23,125.95 and $6,404 for each of the 1977, 1978 and 1979 taxation years respectively.

The appellant submits that the Minister of National Revenue did not take into account in his net-worth assessment, the amount of cash which he had on hand at the end of each of the taxation years under review. The respondent, according to the appellant, has wrongly added to his taxable income amounts which he has not established to have been taxable and such amounts cannot be taxed unless they have the quality of income.

The appellant’s position apparently is that the respondent has the onus of establishing that the amounts added to his income in his net-worth assessment arise from a source of taxable income for the appellant. That, obviously, is contrary to the well established principle enunciated by the Supreme Court of Can- ada in the case of Johnston v MNR, [1948] CTC 195; 3 DTC 1182, where Mr Justice Rand stated at 202 [1183]:

Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.

. . . There, then, appeared the first reference to an allegation that should have been in the claim; and on principle I should call it an indulgence to the taxpayer, assuming that he desired to raise that point in appeal, to be permitted so to cure a defective declaration. The language of the statute is somewhat inapt to these technical considerations but its purpose is clear: and it is incumbent on the Court to see that the substance of a dispute is regarded and not its form.

I am consequently unable to accede to the view that the proceedings takes on a basic change where pleadings are directed. The allegations necessary to the appeal depend upon the construction of the statute and its application to the facts and the pleadings are to facilitate the determination of the issues. It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of facts and rulings of law which have given rise to the controversy. But unless the Crown is to be placed in the position of a plaintiff or appellant, I cannot see how pleadings shift the burden from what it would be without them.

The procedure followed by the appellant in his pleadings is in keeping with the recommendation of the Supreme Court’s decision in the Johnston case, (above), and is also in accordance with the provisions of subsection 152(8) of the Income Tax Act. However, the onus of establishing that the amounts added to the appellant’s income are from a source of non-taxable income and that the Minister’s net worth assessment is wrong, clearly remains with the appellant.

Sufficient evidence has been adduced for the Court to accept that the appellant, over the years, did engage in horse-race betting and gambling to a considerable degree and that some money must inevitably have been won. On the basis of Mr Schwandt’s testimony which corroborated the appellant’s statement, the Court can also accept the fact that the appellant’s earnings were kept in a safe in the uncle’s home rather than being deposited in a bank.

However, there is insufficient evidence as to the amounts allegedly won by the appellant at the races and in gambling, when considered in the light of the considerable amount of cash allegedly on hand at the beginning of each fiscal year under review. In the 1977, 1978 and 1979 taxation years, a total amount of over $45,000 claimed by the appellant to have been accumulated savings earned from gambling, sale of animals, sale of coins and from legacies was deposited in his savings account.

The only tangible evidence with respect to earnings from gambling was Mr Dawson’s evidence who confirmed that the appellant earned $4,500 in Las Vegas in 1978. In my opinion, the fact that the appellant may have won $4,500 in 1978 cannot explain the substantial deposits already referred to, not only because actual use made of this amount cannot be known but also because it is only a small fraction of the gambling earnings alleged to have been won by the appellant but for which little or no evidence was adduced.

In September 1981 when the auditor questioned the appellant with respect to his assets, he did state he had cash on hand but showed no evidence of how much cash he had at the end of each fiscal year, nor where that money had been kept. It is only after having been asked by the Minister of National Revenue to produce a net-worth statement in December 1980, that the appellant did show cash on hand for the years under appeal.

There are also several inconsistencies in the appellant’s evidence. At a time when the appellant alleges to have had considerable cash on hand in his uncle’s safe in 1972, he borrowed money to purchase a car. In 1975, when he claims to have had over $20,000 in his uncle’s safe, he borrowed $4,000 to purchase another car. In 1977 when the appellant alleges to have had over $40,000 in cash, he borrowed $7,000 from the bank and $5,000 from his aunt to purchase a $12,000 bush lot. Although loans made under those circumstances may not be impossible to conceive, they do not appear to me very plausible.

The appellant has not established that the amounts added to his 1977, 1978 and 1979 income by the Minister in his net-worth assessment came principally from gambling or from other usually non-taxable income sources. The Court must conclude that these considerable amounts, which undoubtedly were in the appellant’s possession, came from an undisclosed taxable source.

The very large amounts of the income unreported by the appellant, although as the evidence shows he knew of their existence, eliminate any possibility that the appellant may not have, knowingly or under circumstances amounting to gross negligence, omitted to report the incomes in his tax returns. Penalties levied by the Minister for the 1977, 1978 and 1979 taxation years are justified.

With respect to the appellant’s personal expenditures, the auditor, Mr Cauley, at the hearing, made adjustments and brought corrections to the Minister’s statement of comparative net worth attached to the reply as Annex A. The corrected statement was filed as Exhibit R-2 and it reduced the 1977 personal expenditures figure from $9,844.99 to $6,875.47; for 1978 personal expenditures were increased from $9,424.02 to $10,510.95; and for 1979 personal expenditures were increased from $13,081.21 to $13,804.95.

The overall effect of the respondent’s corrections resulted in an apparent unreported income of $28,667.47 for 1977, $24,541.48 for 1978 and $1,683.78 for 1979 as of the 31st December of each of the said years.

Counsel for the appellant did not agree with the respondent’s corrections. However, he did not indicate to the Court where the Minister had erred nor did he indicate to the Court what he considered to be the correct figures.

The appeal is therefore allowed in part and the matter referred back to the Minister for reconsideration and reassessment on the basis that as a result of the Minister’s correction of his net-worth assessment, the appellant’s unreported income for 1977 is $28,667.47, for 1978 the unreported income is $24,541.48 and for 1979 his unreported income is $1,683.79. Penalties adjusted to the corrected unreported income of the appellant for the 1977, 1978 and 1979 taxation years are justified.

The appeal in all other respects is dismissed.

Appeal allowed in part.