Ronald B Phillips v. Minister of National Revenue, [1983] CTC 2281, 83 DTC 267

Guy Tremblay:— This case was heard on April 30, 1982, at the City of London, Ontario and was completed on May 25, 1982, at the City of Toronto, Ontario.

1. The Point at Issue

Pursuant to the pleadings, the point at issue is whether the appellant, owner of the business of Trans-Canada News & Marketing Services, was correct in deducting different amounts totalling over $60,000 in filing his 1975, 1976 and 1977 income tax returns. The respondent disallowed the deductions and also imposed over $4,000 in penalties.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumptions of fact on which the respondent based the assessments are also deemed to be correct. In the present case, in paragraphs 4(a) to (p) of the reply to the notice of appeal, the respondent described the facts on which he based his assessments:

4. In reassessing the Appellant as aforesaid, the Respondent relied, inter alia, upon the following findings or assumptions of fact, which facts are summarized on Schedule I, attached:

(a) at all material times, the Appellant carried on business as “Trans-Canada News & Marketing Services” (“the business”); (Admitted by Appellant (“ABA”) )

(b) At all material times, the Appellant directed his accountant and his bookkeeper as to the manner of record keeping with respect to the aforementioned business and the nature of entries to be made, and all records were maintained in accordance with the Appellant’s instructions; (ABA)

(c) during the relevant taxation years, the Appellant directed that the following entries be made in the books and records of the business:

		1975	1976 1976	1977 1977
		$	$	$
Amounts paid to J Osborne entered as inven
tory purchases		11,200.00
		(NA)
Expenses entered as business expenses:
(i)	ring and flowers	380.25
		(A)
(ii) furniture and other items for Appellant’s
	farmhouse		7,062.20
			(NA)
(iii) furniture for Appellant’s residence en-
	tered as Class 8 assets and Capital
	Cost Allowance taken	185.65	148.49	118.75
		(A)	(A)	(A)
(iv) Skidoo				1,123.50
				(A)
(v) mortgage payment on Appellant’s resi-
	dence			400.00
				(A)

(The only points not admitted by the appellant are the following figures — $11,200.00 (1975) and $7,062.20 (1976)).

(d) the sum of $11,200.00 paid by the Appellant to J Osborne and expensed in the 1975 taxation year was not paid for merchandise to be used as inventory of the appellant’s business, as stated by the Appellant, and therefore the Respondent assumed that this sum was not an expense incurred for the purpose of gaining or producing income from business as the Appellant failed to prove for what purpose these funds were expended; (NABA)

(e) the amounts referred to in paragraph 4(c)(i)-(v) herein were not expenses incurred for the purpose of gaining or producing income from his business but were personal and living expenses of the appellant; (ABA)

(f) during the 1975 taxation year, the Appellant caused to be credited against his drawings from the business the sum of $5,000.00 which was stated to be a reimbursement to the Appellant of out-of-pocket expenses incurred; the Appellant has failed to prove that the sum of $5,000.00 was in fact expended by him and, if expended, was incurred for the purpose of gaining or producing income of the business, and therefore the Respondent assumed that the sum of $5,000.00 was income of the Appellant in the 1975 taxation year; (NABA)

(g) during the 1975 and 1976 taxation years, the Appellant deposited to his bank account the sums of $5,793.32 and $1,000.00 respectively; the Respondent assumed, in the absence of any proof to the contrary, that these sums were income of the appellant in the 1975 and 1976 taxation years; (NABA)

(h) during the 1975 taxation year, the Appellant purchased term certificates in the amount of $9,100.00; the Respondent assumed, in the absence of any proof to the contrary, that this sum was income of the Appellant in the 1975 taxation year; (NABA)

(i) during the 1976 and 1977 taxation years, the Appellant failed to incude in the computation of his income interest income received by him in the amounts of $922,74 and $1,529.78, respectively; (ABA)

(j) during the 1976 taxation year, the Appellant caused the records of the business to indicate as a capital asset a vehicle purchased at a cost of $6,099.28, $4,300.00 of which was recorded as the “business portion”; as the Appellant failed to prove that such vehicle was purchased for the purpose of gaining or producing business income, and the source of funds for such purchase, the Respondent assumed that the Appellant purchased this vehicle with funds which were income of the Appellant which he failed to include in the computation of his income for the 1976 taxation year; (NABA)

(k) during the 1977 taxation year, the Appellant made payments in the amount of $4,114.31 which payments he caused to be recorded in the books of the business as purchases; the sum of $4,114.31 was not expended for purchases with respect to the Appellant’s business but was on acount of a loan by the Bank of Nova Scotia to a partnership known as “Trans-Canada News Wholesale”; the payment by the Appellant represented his capital investment in the aforementioned partnership or an advance to the Appellant’s former partners, which was not a bad debt of the appellant’s business in the 1977 taxation year; the Respondent assumed that the sum of $4,114.31 was to be included without deduction in the computation of the Appellant’s income in the 1977 taxation year; (NABA)

(l) during the 1977 taxation year, the Appellant caused disbursements in the amount of $2,100.00 to be duplicated in the books and records of the business; adjusting entries removed these duplicated expenses from disbursements of the business and credited them to the Appellant’s Proprietor’s Drawings account; the Respondent assumed that this sum of $2,100.00 was income of the Appelant in the 1977 taxation year; (ABA)

(m) during the 1977 taxation year, the Appellant received $1,500.00 from an employee as a refund to the Appellant of a travel advance received by the employee; travel expenses recorded on the books and records of the business were not reduced by the refunded amount, and the Respondent therefore assumed that the sum of $1,500.00 was income of the Appellant in the 1977 taxation year; (ABA)

(n) The Appellant caused the amount of $2,155.47 paid as wages in the 1977 taxation year to be entered on the books and records of the business twice; the Respondent included this amount in the computation of the Appellant’s income for that year without deduction on the assumption that an expense of $2,155.47 was not incurred by the Appellant, or, if incurred, was not for the purpose of gaining or producing buiness income; (ABA)

(o) the Appellant caused the amount of $1,000.00 to be entered on the books and records of the business as an accrued rent expense in the 1977 taxation year, which amount was not paid by the end of the 1978 taxation year; the Respondent therefore included this amount in the computation of the Appellant’s income without deduction for the 1977 taxation year on the basis that the Appellant did not incur a rent expense in the amount of $1,000.00; (NABA)

(p) the Appellant was a person who, knowingly or in circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of false statements or omissions in returns filed in respect of the 1975, 1976 and 1977 taxation years, such that the tax that would be payable under the Income Tax Act if his taxable income for the year were computed by adding to the taxable income reported by him in his returns for the yearss the sums of $31,659.18 in 1975, $15,232.71 in 1976 and $14,041.85 in 1977 was greater than the tax that would have been payable by him had his tax payable for the years been assessed on the information provided in his returns as follows: 3. The Facts

	1975	1976 1976		1977	1977
Tax payable as «assessed	$8,992.80	$4,992.83		$12,177.36
Tax payable on information provided
in returns	670.86	1,110.01		6,614.90
Difference	8,321.94	3,882.82		5,562.46
Penalty (1/4)	$2,080.49	$	970.71	$ 1,390.62

3.01 At the beginning of the trial, on the fifteen points in dispute pursuant to the proceedings, seven admissions were made by the appellant. The fifteen points at issue appear in Schedule I filed with the reply to the notice of appeal which is reproduced below. The numbered points from 1 to 8 are those which remain in dispute:

SCHEDULE I

RONALD B PHILLIPS

The testimonies of the witnesses are described first in their general statements (paras 3.02 and 3.03), and after in each point at issue (paras 3.04 to 3.11).

A General Statements

3.02.1 In his testimony Mr Yapp, accountant for the appellant and witness for the respondent, testified that:

(a) He is not a member of an association of accountants (SN p 8), but has been in the accounting profession for about forty years (SN p 42).

(b) He prepared the appellant’s income tax returns for the years 1975, 1976, 1977 and 1978 and the financial statements of the appellant’s busi- ness, Trans-Canada News & Marketing Services. These were prepared from the three sub-ledgers (journal sheets concerning payroll, sales, cheque disbursements) written up by Mrs Lynne Phillips, the appellant’s spouse (SN p 9).

(c) Trans-Canada News & Marketing Services was a proprietorship of the appellant.

(d) On April 30, 1976, it seems the business was incorporated under the name of Trans-Canada Wholesale News Incorporated (the “company”). However, one business continued as a proprietorship and one as a company. The taxation year was from May 1st of a year to April 31st of the next year.

(e) The three sub-ledgers were filed as Exhibit R-1. From the three subledgers he prepared the general ledgers (Exhibit R-3) and adjustments to the general ledgers (Exhibit R-2) (SN p 21).

(f) As Exhibit R-4 two pages of adjusting working papers were filed (SN p 27).

3.02.2 In cross-examination by the appellant’s counsel, Mr Yapp testified that:

(a) He remembered that the appellant was not a shareholder of the company, but he had certain financial dealings with the company including the buying and selling of products (SN p 44).

(b) Lynne Phillips was, in 1975, a machine operator at Northern Telecom, but not a bookkeeper or an accountant, and the appellant had absolutely no knowledge of accounting.

(c) He admitted that the three sub-ledgers filed as Exhibit R-1 started from May 1, 1977. The sub-ledgers for the former years, from which he prepared the general ledgers (Exhibit R-3) were brought back to Mrs Lynne Phillips.

(d) He went to the appellant’s office once a month, occasionally every two months, to pick up the records.

(e) Mrs Phillips did not give him the vouchers which resulted in her records.

(f) He stopped working for the appellant in July of 1979.

(g) All the filed Exhibits have been seen by the respondent’s investigator.

(h) The appellant had a Chargex card for personal and business use. The expenses were divided into sixty percent for personal use and forty percent for business use, after discussions with the appellant. He said the card was used for “travel and entertainment and things like that” (SN p 79).

3.03 In his examination in chief Mr Teixeira, auditor for the respondent, testified that:

(a) He obtained his RIA in 1973.

(b) He has been an auditor for Revenue Canada since November of 1974 (SN p 87).

(c) In July of 1979 he made the appellant’s audit. The reassessments were issued in April of 1980.

(d) In the course of the audit, he reviewed the documents filed as Exhibits R-1 through R-4 and also the working papers for all the years 1975, 1976 and 1977. He also looked at the bank accounts, pay cheques and invoices that were available (SN p 90).

(e) Concerning the drawings account, there were no business records available (SN p 94). The things which were missing “were records, origi- nal documents, invoices and, if I might add, bank statements and cheques even were missing” (SN p 129). In cross-examination, he confirmed that “they were just boxes filled with papers with no particular order or very disorganized” (SN p 129).

(f) Q So I take it you would agree as we have heard from Mr Yapp, he would have some difficulty in organizing the books that we have seen here on his monthly visits, or bi-monthly visits to Mrs Phillips and from that disorganized state would have to create, in effect, a set of books as best he could to reflect the activity of the company?

A I can't agree with that because Mr Yapp as he did mention, would call on Mr Phillips every month and we were coming out to do an audit some years later.

Now Mr Yapp alleges that there may or may not have been items shown to him, but he is dealing with a very short period in time. It is one month ago that he is dealing, or two months. We are coming alone say three years later. We cannot say what has happened or who has handled the records for that three- year period (SN p 129-130).

(g) Essentially the financial institutions of the business were the Credit Union and the Toronto-Dominion Bank. However, the personal bank account of Mr Phillips was at the Canadian Imperial Bank of Commerce (SN p 133). In the Credit Union, the account no was 8917 with four accounts, two of which were the account no A — current account, and account no B — savings account. The two other ones were a share account and a loan account.

(h) Mr Phillips was a director of the Credit Union.

3.03.1 In chief examination, the appellant testifed that:

(a) Prior to May 1, 1974, he was an employee of Trans-Canada News London Inc. On May 1, 1974, he established his own business as a proprietorship.

(b) Prior to May 1, 1974, he had $15,000 in an account at the Canadian Imperial Bank of Commerce. It was transferred to an account at the Credit Union which was opened for the purpose of operating a business (SN p 160). There was another $2,000 in an account at the Canadian Imperial Bank of Commerce also transferred to the Credit Union to the shares account.

(c) At the same time, he borrowed $10,000 from the Credit Union and $7,500 from a Mr Bousted.

(d) He purchased the franchise from Osborne for $20,000. He paid $15,000 at the time of purchase and $5,000 within a couple of months (SN p 162).

(e) Osborne continued to operate it for 6 or 7 months and then decided to close the company, Trans-Canada News London Inc.

(f) Concerning the accounting book system, his wife recorded the sales and cheques stubs. In fact, she transferred the purchases from a cheque book into the ledger which was given to the accountant with the vouchers.

(g) The main expenses paid on his credit car were gas, service repairs and entertainment.

3.03.2 In cross-examination, the appellant testified that:

(a) His business sold wholesale magazines to variety stores.

(b) The purchased magazines were remainder magazines: “magazines out in the market and came back in, and then they would be discounted and sold again’, comics books, crossword puzzles. An important part came from the USA, the rest from Toronto or Montreal (SN p 252 to 254).

(c) “The suppliers were a big secret in the business” (SN p 255).

(d) When he bought the franchise from Osborne, one of the clauses was that he had to buy inventory exclusively from him (SN p 255).

(e) Some variety stores paid him at the delivery, some one week after, some 30 days after. They paid cash or by cheque.

(f) He had four salesmen, paid by commission, to make delivery and collection.

(g) Sometimes, he made sales himself, delivery and collection, but he did not know, or did not believe, he paid himself commission, but he thinks that he filled out a deposit sheet (SN p 262).

B Different Points at Issue

3.04 First Point: $11,200 (1975)

3.04.1 The respondent’s position is described in paragraph 4(d) of the reply to notice of appeal:

(d) the sum of $11,200.00 paid by the Appellant to J Osborne and expensed in the 1975 taxation year was not paid for merchandise to be used as inventory of the Appellant’s business, as stated by the Appellant, and therefore the Respondent assumed that this sum was not an expense incurred for the purpose of gaining or producing income from business as the Appellant failed to prove for what purpose these funds were expended;

3.04.2 Mr Yapp said he had no personal knowledge of this amount of $11,200, only from hearsay (SN p 31).

3.04.3 In cross-examination, however, Mr Yapp, witness for the respondent, admitted that:

(a) The said sum was paid to a Mr J Osborne. This gentleman was the former owner (or one of the former owners) of Trans-Canada Wholesale (SN p 60).

(b) It was his understanding that the appellant made the business transaction with Mr Osborne’s business. It was normal for the appellant’s business to have the need for a quantity of materials in the sum of $11,200. He remembered he had seen invoices for such purchases (SN p 60-61).

(c) In the Fall of 1975, Mr Osborne’s business got into trouble and ultimately, in fact, went bankrupt. Then, in late 1975, he sold a great deal of inventory and according to him it is normal that the appellant, who was essentially in the same business, purchased certain products of Osborne’s business (SN p 62-63).

3.04.4 In re-examination Mr Yapp testified that:

(a) He saw Mr Osborne delivering a lot of merchandise to the appellant.

(b) He saw some invoices issued by Osborne to the appellant.

(c) The payments were made in cash by the appellant, . . it was usual practice for him to go to the bank and draw out maybe $2,000, $3,000 or $4,000. He paid for his trip and he also paid for magazines that he bought in the States” (SN p 83). Often, he saw the invoices from the States. The appellant . . spent about $15,000 or $16,000 in the States” (SN p 84).

3.04.5 In his examination, Mr Teixeira, auditor for the respondent said, concerning the $11,200, that:

(a) Four (4) cheques paid to Mr J Osborne were obtained from the appellant’s records:

They were payable to Mr J Osborne. One was negotiated at the Co-op Services and three at the Bank of Montreal with an endorsement, J Osborne and R A Fenn (SN p 103).

(b) The appellant never gave supporting vouchers for the cheques. At the Bank of Nova Scotia he found “some kind of partnership agreement or affidavit . . . that said they were partners in some kind of venture”. It was called “Trans-Canada Wholesale News”. Despite a request to the appellant, no records were given concerning the partnership.

(c) The cheques were recorded as purchases in the disbursements.

(d) The appellant said he purchased the materials of Trans-Canada News London Inc. The respondent, however, received “a letter from that company that they were no longer in operation in November and that all its inventory had been delivered to the dump” (SN p 106). It seems it was in November 1974.

3.04.6 The appellant in his chief examination testified that:

(a) He remembered he paid the four cheques to Osborne for “stock that he offered to sell me and I couldn’t afford to pay him all at once and we just set up that schedule to pay him for it” (SN p 174).

(b) All the stock was delivered in October or November 1974. The appellant personally took the stock from Adelaide Street where the premises of Osborne’s company were.

(c) There was a voucher “because there was schedule of how we were going to pay. Again I just don’t know where the voucher went” (SN p 175).

(d) However, a few weeks before the trial, he met Mr Osborne and succeeded in getting a receipt despite fiscal consequences for him (Exhibit A-1). It reads as follows:

Received from R Phillips (Trans-Canada News Marketing Services) the sum of $11,200.00 for stock sold in October 1974.

(signed)

J Osborne

3.05 Second Point: $14,893.32 (1975)

3.05.1 The respondent’s position is described in paragraphs 4(g) and (h) of the reply to notice of appeal:

(g) during the 1975 and 1976 taxation years, the Appellant deposited to his bank account the sums of $5,793.32 and $1,000.00 respectively; the Respondent assumed, in the absence of any proof to the contrary, that these sums were income of the Appellant in the 1975 and 1976 taxation years;

(h) during the 1975 taxation year, the Appellant purchased term certificates in the amount of $9,100.00; the Respondent assumed, in the absence of any proof to the contrary, that this sum was income of the Appellant in the 1975 taxation year;

It is divided as follows in the T7W-C form anexed to the 1975 reassessment:

3.05.2 Mr Yapp, in cross-examination, practically admitted that he did not know about that.

3.05.3 In his examination-in-chief, Mr Teixeira, said that:

(a) Concerning the unidentified bank deposits and term deposits, “I was not able to find a source for the funds through the books of the company or any other bank account that Mr Phillips had made available to us” (SN p 95-96).

(b) For the fiscal year 1975 the total of $5,793.32 was made up of deposits in two different bank accounts:

After discussions with the appellant and Mr Yapp concerning those amounts, no explanation was provided (SN p 98-99). There was also a bank deposit of $1,000 for the taxation year 1976 (SN p 101, see the sixth point at issue at para 3.09).

(c) Concerning the term certificates totalling $9,100, there were two deposits in the Co-op Savings Account on June 17, 1975, $5,144.01 and $4,050.63. They represented the cashing of two term certificates. This was determined from the records of the Co-op. The deposits were the principal ($5,100 and $4,000) and interest. It was not possible to establish when these amounts were put in, or where the funds came from to acquire these term certificates. They would appear, however, to have a 90- day term (SN p 99-100).

3.05.4 In cross-examination, Mr Teixeira admitted that:

(a) The appellant had, at the end of April 1974, in an account at the Credit Union, an amount of over $9,300 (SN p 141). The amount was the balance of $15,000 deposited on April 15, 1974. The respondent accepted the $15,000 “as monies that Mr Phillips had in his possession at some time or another and brought to the Credit Union and deposited in the Credit Union” (SN p 136).

(b) On April 16, 1974, a loan of $10,000 was made by Mr Phillips from the Credit Union.

(c) There was also another loan of $7,500 (SN p 144).

(d) The $32,500 ($15,000 + $10,000 + $5,000) was the capital account of the appellant when he commenced his business (SN p 144).

(e) The appellant purchased the right to operate the business for $20,000, $15,000 of which was paid on April 185 and $5,000 on May 2nd.

(f) The amount of $9,300 ($4,300 and $5,000) has gone with the current account and that “coupled with the loan of $10,000 was eventually paid to Mr. Osborne”.

(g) A balance of $7,180.62 from the original $15,000 was used with another $2,900 from the share account to acquire a $10,000 term deposit which “has stayed in existence all through 1975, 1976, 1977 and 1978” (S.N. p. 147).

(h) All these amounts totalling $17,000 were withdrawn in April 1974.

3.05.5 In re-examination, Mr. Teixeira explained that:

(a) $4,300 and $5,000 was transferred from the savings account to the current account, and was used together with the $10,000 to pay Mr. Osborne for the franchise fees. Those amounts were not included in the income with respect to term deposits, or with respect to unidentified bank deposits.

(b) The $10,000 ($7,180.62 + $2,819.38) used to acquire the term deposit was not part of the income in the reassessments.

(c) The savings account B started in February 1975. In June 1975, there were two entries, $5,144 and $4,050. Ten days later that was withdrawn to be used as a down payment on Mr. Phillips’ personal residence (S.N. p. 158).

3.05.6 In chief-examination, Mr. Phillips testified that:

(a) The two amounts of $5,100 and $4,000 in the savings account B came Originally from the $17,000 which existed before May 1974. He purchased term certificates — they were for short terms. They were good for collateral if he had to borrow money (S.N. p. 179).

(b) The $10,000 certificate which is in the books through 1975, 1976, 1977 and 1978 originated in 1974 as a term deposit. It was continued to be rolled over until he got up to $10,000.

3.06 Third Point: $5,000 (1975)

3.06.1 The respondent’s position is described in paragraph 4(f) of the reply to notice of appeal:

(f) during the 1975 taxation year, the Appellant caused to be credited against his drawings from the business the sum of $5,000.00 which was stated to be a reimbursement to the Appellant of out-of-pocket expenses incurred; the Appellant has failed to prove that the sum of $5,000.00 was in fact expended by him and, if expended, was incurred for the purpose of gaining or producing income of the business, and therefore the Respondent assumed that the sum of $5,000.00 was income of the Appellant in the 1975 taxation year;

3.06.2 Mr Yapp said this $5,000 appears as an adjustment in Exhibit R-2. According to information received from the appellant, it was used to pay for inventory in cash. Many of the magazines were paid for in cash. On page J7 one can read, concerning the $5,000, “Estimated only, but vouchers are in existence”. There is nothing in the sub-ledgers concerning this $5,000 (SN p 29).

3.06.3 In cross-examination, Mr Yapp admitted that the $5,000 was made up of two entries, one “being an automobile of $1,500 and one being travel and entertainment for $3,500”. One can read the following note: “expenses not claimed previously by management estimated only”. An expense in the said amount was probably made. Many things indeed were paid for in cash out of Mr Phillips’ pocket. The vouchers were lost (SN p 55-56).

3.06.4 In his examination, Mr Teixeira said that the $5,000 was a journal entry made by the accountant setting up out-of-pocket expenses. No vouchers were produced to support this item.

3.06.5 Mr Phillips in his chief-examination, testified that:

(a) This was used for expenses of the car, lunch with clients, etc.

(b) He did not keep vouchers. He was not then concerned that, he “was trying to start business”.

(c) He thinks he did not spend more than 10 to 15% of the $3,500 as personal expenses (SN pp 172 to 174).

3.07 Fourth Point: $6,099.28 (1976)

3.07.1 The respondent’s position is described in paragraph 4(j) of the reply to notice of appeal:

(j) during the 1976 taxation year, the Appellant caused the records of the business to indicate as a capital asset a vehicle purchased at a cost of $6,099.28, $4,300.00 of which was recorded as the “business portion”; as the Appellant failed to prove that such vehicle was purchased for the purpose of gaining or producing business income, and the source of funds for such purchase, the Respondent assumed that the Appellant purchased this vehicle with funds which were income of the Appellant which he failed to include in the computation of his income for the 1976 taxation year;

3.07.2 Mr Yapp said that pursuant to the general ledger, Exhibit R-3, on the page entitled “Automotive and Trucks”, this amount was used to purchase an automobile (Buick) (SN p 32).

3.07.3 In cross-examination, Mr Yapp agreed that the Buick was used by the appellant “in his work to travel all across Ontario and into the States”, “I think he bought it for the business”. He had another car for his personal use (SN p 76-77).

3.07.4 In his examination, Mr. Teixeira testified that:

(a) This entry of $6,099.28 was set up by Journal in April 1976. One part of that entry was a credit to the drawings account of the proprietor, $4,300, with the following notation: “Car into business” in the general ledger (SN p 108-109).

(b) “He set up a debit of $6,099.28, a credit of $1,799.28 and then the $4,300 in the drawings”. He accepted that a car was acquired despite the fact that there was no supporting documentation. It was even impossible to know where the car was purchased. It was not possible to trace the flow of funds. He asked for information concerning this at two meetings with the appellant and Mr Yapp, October 11, 1979 and November 21, 1979 (SN p 110).

3.07.5 The appellant in chief-examination testified that:

(a) $4,300 was used to buy not a Buick, but a Mercury. He traded a Buick on it. “I bought it at Rankin Ford and I am positive the money was borrowed from the Bank of Nova Scotia to purchase it” (SN p 180).

(b) The business had 4 vehicles “We were putting gas in and men staying out overnight in motels and I would say it would be 90 or 95 per cent business” (SN p 192).

3.08 Fifth Point: $7,062.20 (1976)

3.08.1 The respondent’s position is that the amount of $7,062.20 was an expense made in 1976 for furniture and other items for the appellant’s farm house.

3.08.2 In his cross-examination, Mr Yapp admitted that it is not possible, pursuant to the accounting books, to reconcile the said amount of $7,062.20. It was paid in cash and Mr Yapp assumed that it was for business purchases (SN p 78-80).

3.08.3 In chief-examination, Mr Teixeira testified that:

(a) when he reviewed the disbursements journal for purchases he found that there were a number of items that, in his opinion, appeared not to be business purchases. They are detailed as follows:

(b) The appellant bought a farmhouse. There were substantial renovations to be done. The appellant told him that the said renovations were done by friends. However, he admitted items Nos 4 and 5. Concerning B and D Richardson, the witness found at the Bank of Nova Scotia that the appellant had signed a new partnership agreement with Bruce Richardson, John Clark and David Richardson under the name of Trans-Canada Wholesale News. Despite requests, no records were produced concerning this partnership (SN p 113-121).

3.08.4 The appellant, in chief-examination, testified that:

(a) The $400 (item No 1. of para 3.08.3(a)) was given to Dave Richardson to “buy stock in the other company, because the company was in trouble and the bank would not accept their cheques”. Once the stock was packaged and processed, it came into his business and was sold through the company.

(b) The items Nos 2 ($95) and 3 ($96.30) are admitted as income.

(c) The items Nos 8 ($582.52) and 13 ($144.19) purchased from McCutcheon’s Lumber were for his residence.

(d) The items Nos 9 ($700), 10 ($1,200), 11 ($1,635) and 12 ($300) were all cash given to Mr B Richardson to buy stock; and with this, Mr Richardson had no other relationship than a business relationship. He bought merchandise for the appellant’s business (SN p 186 to 189).

3.09 Sixth Point: $1,000 (1976)

3.09.1 The respondent’s position is described in paragraph 4(g) of the reply to notice of appeal:

(g) during the 1975 and 1976 taxation years, the Appellant deposited to his bank account the sums of $5,793.32 and $1,000.00 respectively; the Respondent assumed, in the absence of any proof to the contrary, that these sums were income of the Appellant in the 1975 and 1976 taxation years;

This was a bank deposit.

3.09.2 Mr Teixeira, in his examination, said it was an amount of $1,000 deposited on May 16, 1975. He could get no confirmation at all about it (SN p 100-101).

3.09.3 The evidence described in subparagraphs 3.05.3(a) and (b) also applies to this point (SN p 101).

3.10.1 Seventh Point: $1,000 (1977)

3.10.1 The respondent’s position is described in paragraph 4(o) of the reply to notice of appeal:

(o) the Appellant caused the amount of $1,000.00 to be entered on the books and records of the business as an accrued rent expense in the 1977 taxation year, which amount was not paid by the end of the 1978 taxation year; the Respondent therefore included this amount in the computation of the Appellant’s income without deduction for the 1977 taxation year on the basis that the Appellant did not incur a rent expense in the amount of $1,000.00;

3.10.2 In his examination, Mr Teixeira, testified that:

(a) The said amount of $1,000 was set in accounts payable. In the T7W-C it is described as “amount accrued for rent unvouchered and unpaid”. This entry of $1,000 is the journal entry. It is “debit rent credit accounts payable”. It is to allow the proprietor for an approximate amount of rent owing on TCN Wholesale. It seems TCN Wholesale is the owner of the building where the appellant (Trans-Canada Marketing Services) was storing equipment and magazines. However, there was no voucher. The appellant and Mr. Yapp “did not tell me who it was going to be paid to and it was still unpaid as of 1978”. ‘I was not satisfied . . . even if there was a liability . . .” (SN p 123-124).

(b) The appellant’s business had other rent expenses for the use of the premises at Pacific Court (15,000 to 17,000 square feet) (SN p 124).

3.10.3 In chief-examination, the appellant testified that:

(a) This rent was for the warehouse (1,000 square feet) on Leathorne Drive where Trans-Canada Wholesale News maintained its stock. “To get the stock out, I had to pay the rent” (SN p 188).

(b) He paid “to a fellow that was splitting the building and then some to Rogers Properties” who was the owner of the building.

(c) The sheriff locked the building up before he paid the rent; there was still stock in the building. When later he paid the rent, he took the stock, and transferred it to his warehouse (2,000 square feet) (SN p 190).

3.11 Eighth Point: $4,114.31 (1977)

3.11.1 The respondent’s position is described in paragraph 4(k) of the notice of appeal:

(k) during the 1977 taxation year, the Appellant made payments in the amount of $4,114.31 which payments he caused to be recorded in the books of the business as purchases; the sum of $4,114.31 was not expended for purchases with respect to the Appellant’s business but was on account of a loan by the Bank of Nova Scotia to a partnership known as “Trans-Canada News Wholesale”; the payment by the Appellant represented his capital investment in the aforementioned partnership or an advance to the Appellant’s former partners, which was not a bad debt of the Appellant’s business in the 1977 taxation year; the Respondent assumed that the sum of $4,114.31 was to be included without deduction in the computation of the Appellant’s income in the 1977 taxation year;

Moreover, in the T7W-C form annexed to the 1977 reassessment, the said sum is described as “payment on loan taken out by former partners expenses as purchases”.

3.11.2 Mr Yapp testified that from the general ledger (Exhibit R-3) in April 1977 the said amount of $4,114.31 is a debt to the purchases account. But, this was only on information from the appellant. Indeed, there is a note, “advice from management lacking any details”. The same figure appears as

a credit in the loan account with the following note: “adjust to actual on management advice’’ (Exhibit R/4, page 1). Mr Yapp said it is not usual to have a debit to “purchase” and a credit to “bank loan” (SN p 39-41).

3.11.3 In cross-examination, Mr Yapp remembered that:

(a) The sum of $4,114.31 was paid to the Bank of Nova Scotia following a lawsuit against the appellant because of a guarantee given by the latter on Mr. Osborne’s loan. At the time the appellant was the only guarantor available (SN p 64).

(b) It was possible for the appellant to have had an interest “in Osborne staying in business” because the latter supplied the appellant with some products of which Mr. Osborne was the only source of supply (SN p 65- 66).

3.11.4 In his examination, Mr. Teixeira confirmed:

(a) The testimony of Mr Yapp in subparagraph 3.11.3. He added there was nothing about that $4,114.31 in the disbursements journal.

(b) The loan account referred to was at the Bank of Nova Scotia for the purchase of a van, pursuant to the information of Mr Yapp. He was also told by Mr Yapp that Mr. Phillips had signed or co-signed some loans at the bank with three partners (the two Richardsons, Clark and Phillips himself). This was found from the records of the bank (SN p 126-127).

(c) He was told by Mr Phillips it was not a purchase, but he had certified a guarantee. He had done nothing to recover that money (SN p 127). Mr Phillips had called Mr Clark, but “was told that since he was in England he will not be held responsible, that is Mr Phillips telling me that”.

“Then the Richardsons were not paying either and Phillips then mentioned that he had got purchases from Clark in ’79 and he has offset some of the payments of these purchases against the loan that Mr Phillips had to make good.”

“But there was nothing produced, there were no documents or invoices or anything produced at ths point to support any of the remarks. This was covered on a meeting of October 17th”, 1979 with Mr Phillips (SN p 128).

3.11.5 In chief-examination, the appellant testified that after Trans-Canada News London Inc. was closed, a partnership was formed (Osborne, Clark, the two Richardsons and the appellant) to buy the products from TransCanada Wholesale News. It seems that this partnership became a limited company. He had to sign and counter-sign the cheques. The said company lasted only one month. However, he had co-signed for loans and he had to pay around $4,100 when the bank sued him (SN p 164-168).

4. Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in the present case are section 3, 9 and 18, subsections 152(7), 50(1) and 163(2), and paragraph 20(1 )(p). They shall be quoted in the analysis, if necessary.

4.02 Analysis

4.02.1 First Point: $11,200 (1975)

The said $11,200 was paid to J Osborne according to Mr Teixeira, auditor for the respondent (para 3.04.5). It is true that when he investigated he could not produce vouchers to support the appellant’s contention that the payments were were made to buy merchandise. Before the Board, however, the other respondent’s witness, Mr Yapp, testified he had seen invoices for such purchases (para 3.04.3(b)). This is also confirmed by the testimony of the appellant (para 3.04.6), and the receipt of Mr. Osborne (Exhibit A-1, para 3.04.6(d)) despite his “reticence” to issue it because of the fiscal consequences.

The Board concludes that the preponderance of the evidence is in favour of the appellant’s thesis.

4.02.2 Second Point: $14,893.32 (1975)

It is admitted by Mr Teixeira, the main witness of the respondent, that when the appellant commenced his business, he had a capital of $32,500 (para 3.05.4(d)). However, he spent $20,000 to purchase the franchise (para 3.05.4(e)). Another $10,000 was used to acquire a term deposit (para. 3.05.5(b)). Those amounts, however, totalling $30,000 were not included in the income of the appellant. The appellant tried to explain that the amount of $14,893.32 was paid with money he had in April 1974. However, there remained a balance of only $2,500 ($32,500 - $30,000), and the preponderance of the evidence is to the effect that the amount of $12,393.32 ($14,893.32 - $2,500) must be considered as income.

4.02.3 Third Point: $5,000 (1975)

Because there are no vouchers, and because these expenses were “not claimed previously by management estimated only”, pursuant to a note in the accounting books, the Board is not inclined to accept them. However, according to Mr Yapp, witness of the respondent, many things were paid for in cash, out of the appellant’s pocket. The Board allows $2,000 in expenses.

Despite the other note in Exhibit R-2 (para 3.06.2) that “vouchers are in existence”, it does not seem that Mr Yapp had seen them because they were not claimed previously by the management, and Mrs Phillips did not give to Mr Yapp (para 3.02.2) the vouchers which resulted in her records. Three thousand dollars ($3,000) should be retained as income; such is the result of a bad accounting system.

4.02.4 Fourth Point: $6,099.28 (1976)

It is accepted by Mr Teixeira that a car was acquired. The Board is ready to accept that $4,300 was used for such a purchase. The testimonies confirm the journal entry (para 3.07.4). The balance of $1,799.28, however, must be retained in the income. Indeed, a Mercury was purchased according to the appellant. He traded a Buick on it. It was bought at Rankin Ford (para 3.07.5(a)). It would have been easy to have documents, especially at the time of the investigation. This could have explained the $1,799.28.

4.02.5 Fifth Point: $7,062.20 (1976)

The testimony of the appellant concerning the Richardsons’ items Nos 1 ($400), 9 ($700), 10 ($1,200), 11 ($1,635) and 12 ($300) which total $4,235 are confirmed on certain aspects by the partnership agreement found at the Bank of Nova Scotia. However, there are no vouchers at all. There is no confirmation by the said Richardsons. However, the expenses seem plausible. The Board allows 50% of the said $4,235 which is $2,117.50. As the other items are admitted except for No 7, the Board, however, disallowed this item because there is no voucher, and no evidence was given; therefore from the total of $7,062.20, the amount of $2,117.50 is allowed only as expenses.

4.02.6 Sixth Point: $1,000 (1976)

The amount deposited in the bank in May 1975 (1976 taxation year) cannot be explained by the amount of $32,500 he had at the commencement of the business in April 1974. No particular evidence was given by the appellant on this $1,000. The reassessment must be maintained on this point.

4.02.7 Seventh Point: $1,000 (1977)

The story of the appellant (para 3.10.3) sounds reasonable. However, as there is absolutely nothing to confirm it, the Board cannot accept it. Saying something in Court, even under oath, does not always constitute valuable eidence; it must be confirmed by something else (document, other testimony).

4.02.8 Eighth Point: $4,114.31 (1977)

The preponderance of the evidence is in favour of the appellant’s thesis. The testimony of Mr Teixeira confirms the testimonies of Mr Yapp and of the appellant.

4.02.9 Penalties

Because the accounting system was inadequate, and especially because of the absence of vouchers, the Board considers that these circumstances amount to gross negligence. Therefore, the penalties must be maintained on the amounts disallowed in these reasons.

5. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.