Myron Pasnak v. Minister of National Revenue, [1984] CTC 2719, 84 DTC 1677

Taylor, TCJ:—This is an appeal heard in Edmonton, Alberta on July 10, 1984 against income tax assessments for the years 1977, 1978 and 1979, in which the Minister of National Revenue increased the reported income of the taxpayer by some $260,000 as a result of a “net worth” examination of his affairs.

At the commencement of the hearing, counsel for the respondent noted for the Court that due to some additional information provided that day to the Minister, certain changes were to be made to the above determination, with the result that the amount at issue to be dealt with at the hearing, now was approximately $110,000.

Mr Pasnak testified that he operated a small grain and cattle farm. A Mr David Wilde, his accountant, also provided certain information. In essence, Mr Pasnak claimed that the remaining unexplained discrepancies, in major part, came as a result of the death of his father in 1978. In the year or so before his death, the appellant’s father had given him substantial sums of money — and this procedure continued right up to the day that his father died. Indeed some of the adjustments made just before the hearing by the Minister, (supra), did acknowledge that there was evidence (apparently satisfactory to the Minister) supporting just such receipts of substantial funds. There remained several large areas however in which there had been increases in the assets of the appellant — and he claimed these also arose either from funds given to him by his father; or by his mother subsequent to his father’s death; or as a result of the sale of some of his father’s assets — cattle, etc, after his father’s death. Mr Wilde’s limited contribution was that he had known the senior Mr Pasnak, and did not think it unreasonable from the preparation of the deceased man’s tax returns, that he could have had very substantial assets of the order indicated by the appellant. The “investment income” etc shown on the recent tax returns of the senior Mr Pasnak indicated the possibility of bank deposits, or other investments amounting to perhaps $60,000 or $70,000, but Mr Wilde attempted to place his net worth at perhaps $130,000 or $140,000, which would include cattle, machinery and probably cash on hand. The Court places only a limited weight on Mr Wilde’s views on this matter, since it would appear the senior Mr Pasnak was quite a secretive man — even as regards the appellant, his son. Nevertheless to whatever degree it can be held relevant, there was evidence of considerable ready assets under the control of the senior Mr Pasnak. It was simply the contention of the appellant that all his father’s assets had passed to him during the times material, and that had resulted in the huge and (according to the Minister) unexplained additional assets. The appellant had kept records, and filed tax returns and his counsel did admit that amounts of $385.25 and $2,400 (1978), and $644.49 (1979) (noted in the Minister’s net worth schedules) had been omitted in the filing of his tax returns and should be included, but counsel contended that these were innocent omissions and did not confirm or warrant the tax treatment under dispute before the Court.

A Mr John Mesine, auditor for Revenue Canada, testified regarding the examination of the affairs of Mr Pasnak. He noted that there were few bank records, but regarded this as acceptable since Mr Pasnak apparently almost always paid his bills by cash. On one visit, he had received the explanation from Mr Pasnak that he (the appellant) had received from his father something like $50,000 in 1978 and $60,000 in 1979. Lacking any proof of this he had not given the taxpayer credit for it, in the original “net worth” assessments. He had not received detailed explanations, in answer to various questions, and there seemed to him to be a degree of uncertainty in the information he had received from the appellant and/or Mr Wilde. He recommended the penalties which were imposed (a) because the apparent discrepancy (a schedule was provided) had been so great when compared with the reported income of the taxpayer; and (b) because certain amounts (those already conceded by counsel for the appellant — above) had clearly been omitted from income.

Mr Mis, counsel for the appellant, in argument rejected any reasonable basis for the imposition of penalty. First, the conceded amounts were virtually insignificant, and quite probably had been missed by the appellant because of unusual circumstances surrounding their receipts; and second because all the evidence presented to the Court (oral by Mr Pasnak in the majority) when compared to the tax returns of the senior Mr Pasnak (which were filed) did support the appellant’s proposition that he had inherited from his father very considerable assets, even if in a rather unusual manner. But, Mr Mis relied also upon the conviction that given the basic nature of the appellant’s farming operation, and his lengthy (all his life) activity in it and in the same place, he could not have had income from that operation in anything like the amounts still attributed to him by the Minister’s “net worth” assessment.

The position of counsel for the Minister was essentially that the Court had before it little or no evidence upon which to conclude that the discrepancies resulted from funds coming from the taxpayer’s father, and that Mr Messine had regarded it as completely possible and probable that additional income of more than $260,000 (original net worth assessment) could have arisen in the relevant years and gone unreported by the appellant. This at least held true for the much reduced revised net worth assessment — a discrepancy of some $110,000.

I have long held the view that the responsibility for the Minister in an appeal of this nature under section 163 of the Act does not include the Minister assuming the normal onus on a taxpayer with regard to the amount of the tax itself. I have also noted that it is a difficult task for the Minister to support the imposition of a penalty arising out of an amount of tax based on a “net worth”. Certainly, this appeal confirms my opinion with regard to the second proposition, but it has also given me grave reservations about my position on the first proposition. In this matter, I am quite prepared to say that the Minister’s rejection of the taxpayer’s explanation of his increased assets (gifts from his father and mother); and the bland acceptance that somehow in the years under appeal this taxpayer could have earned income from his farm operation of the amounts still in dispute at the hearing (let alone those upon which he was originally assessed), leaves me at a complete loss. I am not much wiser after the hearing regarding where all the excess funds might have come from, and there are all kinds of hypotheses one might consider. One such proposition could be that the appellant was doing all the farming and raising all the cattle, grain, etc, (for both himself and his father) so that any funds which could have been in his father’s hands really always belonged to the appellant; or that the appellant accumulated such vast sums of money carefully hidden and for some unknown reason brought out into the light of day only during the years in question; or some other speculation. Some of these, counsel for the Minister did put forward for the Court’s consideration. However, I can think of none of them which is more plausible, based upon what has been provided to me, than the explanation provided by the appellant, the funds simply came from his father. I am certain of one thing — he did not earn from his farm additional amounts of anything like those assessed to him in the first “net worth” and those still remaining in the second “net worth” do not appear to have any more viable support as originating on the farm. In simple terms, his net assets (according to the Minister’s original assessment) by January 1, 1977 after some 30 years of farming were about $106,000. They did not increase to $366,863 in a matter of three years from the same operation as I see it, which was the original position of the Minister, not even to an excess of some $200,000 as would remain after the adjustments already conceded by the Minister.

Counsel for the appellant noted for the Court that in a schedule he had provided to the Court, he gave detailed explanations (later testified to by the appellant) for all but a small part of the alleged discrepancies lacking further specifics, he left it to the Court to determine if these amounts also (as a result of the net worth) should be added to those already conceded by him at the start of the hearing. But of course he saw no reason for the imposition of any penalty on them. I do not hold the view that these other amounts should be included in the income tax assessments, under the obscure and most unusual circumstances of this case.

The appeal is allowed in part, in order that all amounts assessed against the taxpayer are deleted save and except the amounts of $2,785.25 for the year 1978 and $644.99 for the year 1979. All penalties are to be deleted. The entire matter is referred back to the Minister for reconsideration and reassessment.

Appeal allowed in part.