Estate of the Late Charles Marchand v. Minister of National Revenue, [1982] CTC 2128, 82 DTC 1097

Guy Tremblay [Translation]:—This case was heard at Montreal, Quebec on September 19, 1979.

1. Point at issue

The issue is whether the estate of the late Charles Marchand, hereinafter referred to as “the appellant”, was entitled to claim the sum of $28,740.22 for 1972, and the sum of $18,542 for 1973, as expenses related to promotional activity and competitions among the sales staff designed to promote the sales of Economy Ware Kitchen Specialties Ltd.

It is further necessary to determine if the increases in rental income in 1973 ($5,000) and in 1974 ($9,312) assessed by the respondent are justified.

2. Burden of proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

Furthermore, according to the same judgment, the allegations of fact on which the respondent relied in issuing the assessments must also be taken as true until the contrary is proved by the appellant.

3. Facts alleged by the respondent

The facts relied upon by the respondent are set out in paragraph 2 of the reply to the notice of appeal. They read as follows:

2. In his assessment of the late Charles Marchand for 1972, 1973 and 1974 the respondent relied, inter alia, on the following facts:

(a) the late Charles Marchand, hereinafter referred to as “the taxpayer’, died on August 9, 1974;

(b) in life, the taxpayer was manager of Economy Ware Kitchen Specialties Ltd;

(c) for his 1972 taxation year, the taxpayer claimed to deduct $28,740.22 from

his income of $71,320.00 from Economy Ware Kitchen Specialties Ltd;

(d) the taxpayer alleged in his income tax return that the sum of $28,740.22 represented expenses related to “promotional activity and competitions among the sales staff designed to promote the company’s sales”, but no supporting document was filed to substantiate these alleged expenses;

(e) on several occasions, most notably in letters dated October 21, 1970, May 17, 1972 and June 13, 1972, officials acting on behalf of the respondent advised the taxpayer of the need to retain his supporting documents, failing which his claimed expense deductions could be disallowed;

(f) Economy Ware Kitchen Specialties Ltd reimbursed the taxpayer for the aggregate of sales and promotional expenses incurred by the latter;

(g) as the taxpayer had filed no income tax return for the 1973 taxation year, the respondent estimated the taxpayer’s income on the basis of the T-4 slips issued by Economy Ware Kitchen Specialties Ltd ($38,364.00 and $7,650.00), as well as the T-5 slips issued by various financial institutions;

(h) moreover, as regards the 1973 and 1974 taxation years, the respondent estimated that the gross rental income generated by the building located at 5786- 90 Christophe Colomb was $25,000.00 in 1973 and $15,312.00 in 1974 (the taxpayer died in August 1974, which explains the rents calculated for a period of seven and a half months), based on the fact that for 1971, the taxpayer had declared a gross rental income of $21,440.08 and that it is reasonable to assume an annual increase of 5 per cent in rental income;

4. Proven facts

A. General observations

4.01 The principal witness was Mr Gilles Marchand, the son of the deceased Charles Marchand. The witness is also the only one to accept the appellant’s estate. The witness’s mother and the five other children refused it.

4.02 The witness acknowledged allegations (a), (b), (c) and (d) of the facts alleged by the respondent.

4.03 The company known as Economy Ware Kitchen Specialties Ltd was formed in 1962, its main purpose being the sale of household equipment. The company’s financial year ended on March 31 of each year.

4.04 This company ceased operations in November 1974, following the seizure by the Department of National Revenue of all the company’s documents and all the documents belonging to the appellant; the seizure was carried out both at the company offices and at the accounting firm of Lagarde, Diry et al.

4.05 The witness holds one-third of the company’s shares.

4.06 When the witness accepted the appellant’s estate, he undertook to have returns filed for 1973 and 1974. This filing occurred on August 6, 1975. It was however an amended return since, as the result of a seizure of documents, the respondent had himself filed the 1973 and 1974 returns and issued an assessment on April 25, 1975.

4.07 The witness, Gilles Marchand, had himself been since 1971 manager of the “Le foyer de la future ménagère Itée” company, which was located at 5786-90 Christophe Colomb, Montreal, a building formerly owned by the late Charles Marchand.

4.08 The witness Gilles Marchand stated that he knew nothing of allegations (e) to (h) of paragraph 2 to the notice of appeal.

4.09 Mr Gilles Marchand filed as Exhibit A-1 a letter from General Trust of Canada dated September 8, 1977, establishing payments of principal and interest on two mortgages numbered 40-13800 and 40-13801 for 1972, 1973 and 1974. These payments are broken down as follows:

Mortgage 40-13800

	Interest	Principal	Total
72	1,787.50	3,600.00	5,387.50
73	1,553.50	3,600.00	5,153.50
74	709.95	1,800.00	2,509.95
Mortgage 40-13801
	Interest	Principal	Total
72	5,250.00		5,250.00
73	5,250.00		5,250.00
74	2,625.00		2,625.00

A series of six cheques made out in 1973 and 1974 were filed as Exhibit A-1 to confirm these payments.

4.10 Moreover, also as Exhibit A-1, a series of photocopies of nine cheques made out to the City of Montreal was filed to establish the payment of taxes.

These nine cheques covered a period beginning November 2, 1973 and ending December 28, 1973; each cheque was for $1,070.35.

4.11 All these cheques, which were issued both to General Trust of Canada (para 4.09) and to the City of Montreal (para 4.10), were made out not by the appellant, but rather by “Le foyer de la future ménagère Itée”. According to Mr Marchand, these payments by the company constituted rent for use of the premises at 5786-90 Christophe Colomb.

4.12 Further testimony from the witness Gilles Marchand indicated that rental income and expenses for 1973 and 1974 broke down as follows:

4.13 Gross income from rent was raised by $5,000 (Exhibit 1-2, p 65) in 1973 and by $9,312 (Exhibit I-2, p 67) in 1974.

4.14 The respondent filed as Exhibit I-2 a sheaf of documents contained in a 131-page volume and filed under 21 tabs from A to U.

These documents are largely income tax returns filed by the late Charles Marchand from 1969 to 1974, reassessment notices for the same years and T7W-C explanation forms.

Also filed were income tax returns, reassessment notices dated February 25, 1977 and T7W-C forms relating to Economy Ware Kitchen Specialties Ltd. A further submission was the notification of September 26, 1978 affirming the reassessment notices of February 25, 1977, following the notices of objection filed March 17, 1977 by Gilles Marchand with regard to 1972, 1973 and 1974.

4.15 Also filed were three letters dated October 21, 1970, May 17, 1972 and June 13, 1972. Issued by the respondent, these letters advised Mr Charles Marchand of the absence of supporting documents and of the necessity to retain the said documents, and asked that they be submitted for assessment of the 1970 taxation year. No reply was forthcoming.

4.16 Finally, three more letters, dated September 20, 1976, September 27, 1976 and November 3, 1976, were issued by the respondent. In these letters, Mr Gilles Marchand was requested to submit supporting documents in substantiation of income and expenses in 1972, 1973 and 1974. No such documentation was supplied. However, Mr Marchand confirmed that a flood had taken place in 1976.

4.17 Mr Normand Langelier conducted the field audit in this case on behalf of the respondent. He declared expenses of $28,740.22 and $18,542, that had been claimed in the computation of the appellant’s income for 1972 and 1973 as promotional expenses for the 500 sales staff employed at Economy Ware Kitchen Specialties Ltd. These expenses were refused initially on the grounds that no supporting evidence had been filed to substantiate these expenses, and also because Economy Ware Kitchen Specialties Ltd had claimed the same expenses itself.

4.18 Mr Langelier further explained that rental income for 1973 and 1974 had been increased by $5,000 and $9,312. He based this conclusion on the following: according to the information provided, the income from seventy- three rental units was estimated at $20,000 in 1973 (Exhibit 1-2, p 39). According to the appellant’s returns, these rent payments were $23,330 in 1972 (Exhibit 1-2, p 27) and $21,440.08 in 1971 (Exhibit 1-2, p 20). By using the data established by the appellant in 1971 and increasing it by 5% for each year elapsed, the respondent arrived at the amounts of $25,000 for 1973 and $26,250 for 1974. However, this amount of $26,250 was revised downward to $15,312. As Mr Charles Marchand in fact died in late August 1974, only seven-twelfths of the $26,250 was included in income.

4.19 In computing its income for the years 1972 and 1973, Economy Ware Kitchen Specialties Ltd claimed, inter alia, all the expenses listed below along with all the necessary supporting documents:

4.20 Mr Langelier maintained that the investigation never disclosed any vouchers for the expenses claimed by Mr Charles Marchand but that, in any event, he checked more than half of the company’s vouchers before allowing expenses for the total amount.

5. Act — case law — analysis

5.01 A ct

The chief sections of the Income Tax Act that apply in the case at bar are section 3, paragraph 8(1 )(f), section 9, paragraph 18(1 )(h) and section 67; these will be cited where necessary.

5.02 Case law

The case law cited by the appellant is as follows:

1. MNR v Pillsbury Holdings Limited, [1964] CTC 294; 64 DTC 5184;

2. Miron & Frères Ltée v MNR, [1955] CTC 182; 55 DTC 1109; and

3. RWS Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

5.03. Analysis

5.03.1 Supporting documents not filed

The chief argument of the representatives of the appellant concerning vouchers for promotional and sales competition expenses designed to boost the company’s sales was that some of these vouchers were seized in 1974 by the respondent and the remainder were lost in a flood in the spring of 1976.

It is further alleged that the assessments of 1970 and 1971 were issued on the basis of allowing Mr Marchand to claim half of these promotional expenses. The Board takes into account the testimony given by Mr Langelier, who carried out the seizure, and who stated that he saw no vouchers regarding the said sales promotion that may have been incurred by Mr Charles Marchand on behalf of the company’s sales staff (para 4.17). As for the flood, it has been established that it took place and that is all. No evidence, however slight, of the destroyed documents has been forwarded to the Board. Finally, the Board has strong reservations about the propriety of these expenses by the appellant when the company itself had spent substantial amounts of money for the same purpose (para 4.19).

Nor can the Board ignore the formal notices — letters written to the appellant in 1970 and 1972 — concerning the supporting documents that were to be kept (paragraph 4.15). The late Charles Marchand was an experienced businessman who retained the vouchers concerning his company; he could hardly be unaware that he had the same duty with regard to his personal expenses. The fact that the respondent issued an assessment in 1970 accepting 50 per cent of expenses in the absence of vouchers does not constitute an argument in the appellant’s favour, especially in view of the formal notices that were received (para 4.17).

The burden of proof that rested with the appellant has not been shifted. The Board upholds the reassessment notices regarding the disallowed expenses of $28,740.22 (1972) and $18,542 (1973).

5.03.2 Increase in rental income in 1973 and 1974

The Board is at a loss to understand how the accountants have been able to provide only an estimate of rental income for 1973 ($20,000) and 1974 ($6,000 for seven and a half months). No doubt the absence of vouchers and an accounting system had a similar detrimental effect on this aspect of the affairs of the late Charles Marchand.

As the number of housing units remained unchanged throughout 1973 and 1974, the rule of the 5 per cent increase applied to the respondent (para 4.18) on the basis of income from 1971 is a much more realistic approach than an estimate the basis of which is not apparent in the evidence. The fact that “Le foyer de la future ménagère Itée” paid taxes and mortgage payments as rent, as established by the witness for the appellant (paras 4.09, 4.10, 4.11), does not diminish the position of the respondent, and at any rate, these payments must be regarded as rental income for the late Charles Marchand, even though an expense for a corresponding amount must be deducted.

The Board therefore upholds the reassessments for 1973 and 1974 with regard to the increase in rental income of $5,000 in 1973 and $9,312. in 1974.

6. Conclusion

The appeal is therefore dismissed in accordance with the above reasons for judgment.

Appeal dismissed.