Raymond Poratto v. Minister of National Revenue, [1982] CTC 2133, 82 DTC 1113

Guy Tremblay:—This case was heard in Sudbury, Ontario, on June 18, 1981.

1. Point at issue

The general point is whether the appellant is correct in including in his income for the 1972 to 1977 taxation years the amount of $57,136.61. The respondent contends that another amount of $152,012.51 must be added for the said years.

2. 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 particularly 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 assumed facts on which the respondent based the assessments or reassessment are also deemed to be correct. In the present case the assumed facts are described in the Reply to Notice of Appeal as follows:

4. In reassessing the Appellant for his 1972 to 1977 taxation years, the Minister of National Revenue assumed, inter alia, that:

(a) The Appellant, in reporting his 1972, 1973, 1974, 1975, 1976 and 1977 income did not bring into the computation of his income all income received by him in those years;

(b) the income of the Appellant during the above taxation years was understated by $151,012.51.

2.03 Penalty

The penalties are on the respondent’s shoulders in virtue of subsection 163(3) of the Income Tax Act to prove that the taxpayer knowingly or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Act, has made, or has participated in, assented to or acquiesced in the making of a false statement or omission in a return, certificate statement or return filed or made in respect of a taxation year as required by or under this Act or a regulation.

3. The facts

3.01 The appellant, during the years involved in this appeal, operated a car rental agency: Poratto Wheels and Rentals.

3.02 For each of the 1972 to 1977 taxation years, the taxpayer filed his income tax return and declared the following total income for the years:

3.03 After an investigation by the employees of the respondent, the latter, on February 26, 1979, issued Notices of Reassessment on the basis of the “net worth” method whereby he determined the appellant’s revenue for the period in question and added to his income the amounts (stated hereinafter). He also imposed penalties as follows:

3.04 The two-page statement of personal net worth of the appellant prepared by the employees of the respondent was filed as Exhibit R-1. The financial year of the appellant is from July 1 to June 30 of each of the years involved.

3.05 The first page of the statement gives the addition of the assets of the appellant for the years 1971 to 1977 ending on June 30 of each year. The total assets less the CMHC mortgage gives the net personal assets of the appellant:

3.07 The appellant does not dispute the quantum of the figures in the statement.

He affirmed however that the assets described on the first page (bank accounts, residence, pieces of land, summer cottage, loan) are not his own assets but “They are Ray Poratto assets. They are Ray Poratto assets in trust for my family and myself’ (SN page 6, lines 13 and 14). According to him, those assets were acquired not from income he earned but from revenue.

He explained to the Board what he meant by income and revenue:

Money that I received from various sources that had already been taxed or that were not taxable I would call revenue, not income. Revenue to my business, it is different than — or capital that comes into my business is different than income that comes to me personally on which I should pay income tax, if I make myself clear, Mr. Chairman. The assets listed, in other words, are the result of these revenues that have been received by me in trust from a variety or sources, if you will. (SN pp 6 and 7)

3.08 The appellant had on hand four pages of different figures. He explained:

I don’t have a figure by year, Mr. Chairman. I only have a figure by category and by total, if, you will, by category. The year is insignificant to me in my statement with respect to the origin of these funds. The year is insignificant. I have no listing by year. I only have a listing by category, the source in other words and the amount. (SN pp 7 and 8)

3.09 According to the appellant, the revenue comes from three sources:

1. . .. from my family’s personal input into my business in ten years, their work comprised of seven to twelve people at varying times, different numbers of people (SN p 10);

2. . . . would be savings and introduction of capital on the part of those people into our business . . . (SN page 10); and

3. . . . and the third source would be capital or funds that come forward from previous activity of mine that had been previously taxed . .. (SN p 10).

The total amount of those revenues is $130,000.

3.10 The total of $130,000 was detailed in a four page “aide-memoire” entitled “Recap of Records” which the appellant used in testifying. There are 22 main points and figures on it. Those points are used in describing the appellant’s evidence.

3.10.1 “Brother Gene” $10,470

His brother Gene, who was a former soldier and a veteran of [the] last war, lived with the appellant during the years involved in this appeal. He paid room and board to the appellant from his veteran’s pension. He worked for the appellant in his business and was paid $10 to $50 per week. Gene gave the money back to the appellant. This amount of $10,470 was Gene’s equity in the appellant’s business.

3.10.2 “Brother Will” $3,600

His brother Will lived with the appellant for one and one-half years and paid room and board of $20 per week to the appellant’s wife. That money was put in the business. He also worked in the business and received $10 to $25 per week, which was put back in the business. From the amount of $3,600, his share in the business would be $2,500.

3.10.3 “Wife Claudette” $5,250

The appellant paid his wife $50 per month to answer the telephone, make reservations, etc, during seven years ($600 x 7 = $4,200). The Board states that the appellant calculated the expenses for seven years despite the fact that there are only six taxation years involved in the present case. He said however that she was not on the payroll of Poratto Wheels — “there’s no payroll book”. (SN page 84) He continued: “I don’t give her anything. .. . We just keep track of it and then I make a cheque out, she endorses it back to me and I put it back in the business”, (SN page 85). “There is no physical transaction.” (SN page 85) He also said that sometimes he made a cheque, she endorsed it and gave it to him.

His wife received “a 20 year endowment” insurance policy of $1,000. This $1,000 was used to pay the bank when they asked for more money in order to finance the cars in 1972 or 1973.

3.10.4 “Children” $10,250

The appellant has seven children, the youngest being 10 years old. The amount of $1,250 was received as family allowance, and the amount of $9,000 was received from the other children (17 to 26 years old) who worked during the years they were attending school (babysitting, etc). The $9,000 which they received during the six years was remitted to the appellant to help the family.

3.10.5 “Mother & Angelo” $7,500

Over the years the appellant received in cash from his mother and stepfather, Angelo, $7,500. That money was invested “in those bonds so that I could borrow money against those bonds to buy automobiles for my car rental. These monies went into these certificates that he is showing here”.

3.10.6 “Cost of living” $30,000 overcharged

According to the appellant, the personal expenditures or cost of living for him and his family do not total more than $50,000. During the years involved there were ten at home. Exhibit R-1 shows as personal expenditures $74,000. The appellant says the total is $80,000 and therefore, $30,000 overcharged. He said that his wife had a budget which is possible to verify.

3.10.7 “Gene’s Property” $7,400

In the assets of the appellant (Exhibit R-1) one is described as “Dill Lake Road Lot”. It was acquired in 1975 for $7,471.74. “I purchased that on an experiment with my brother with funds that I took from him.” Gene indeed received a “sizeable pension from the army. He was discharged as a 100% disabled pensioner.” Mr Nelson, an employee of the respondent, confirmed that he has a photocopy of the deposits in an account over a period of two years. . . there was an accumulation of money put into an account for that purpose” he said. There was “a little shack” on the property. “We made an experiment for him (Gene) to go and live there on his own, but it didn't work out.”

3.10.8 “Storm Cyclone” $11,247

The appellant testified that, in the fall of 1971, a cyclone “came through Sudbury, blew my house, the top part of my house down”. The total damage was something like $17,000 or $14,000. He received $9,000 from his insurance company as the building where he ran his car rental business was also damaged. He also received two cheques, one for $1,447 and another for $800.

The appellant said that he did the repairs himself, with the help of friends. He did not have to pay a contractor. In cross-examination, a letter issued by the insurance company was read which stated that an amount of $12,247 was given to the appellant in 1971 — the storm occurred on August 1970 (extract from the Globe and Mail newspaper).

3.10.9 “Gambling — Lions Club” $4,500

The appellant said that “in this period of time” (years involved) he won $3,000 at the Lions Club, the Pot of Gold. He said he received the amount from a Mr Verne Welch, probably the president of the Sudbury Lions Club.

He also won $1,500 on a trip to Las Vegas. The trip was free because he had worked for a Mr Laberge. “lI got it from Laberge for an advertising program.” (SN page 30) He said that many people were aware that he had won the $1,500.

3.10.10 “Previous lOU’s” $900

The appellant explained that, before 1972, he had lent money totalling $500 without interest to two brothers-in-law, Leo Corbeil and Jacques Cor- beil.

He also repaired two cars. He was owed $400.

3.10.11 “MCM Settlement” $2,000 (SN page 35)

The appellant explained that, after working 17 years for Meredith- Connelly Motors, he left in February 1970. Before 1971, he received an amount of $2,000 due to him. The Board states that this amount was received before the years involved. Therefore it was included in the statement of personal net worth as of June 30, 1971.

3.10.12 “Mr Clara” $900 (SN page 35)

The appellant received $900 from a fellow named Clara. It was the balance due for a piece of land sold to him by the appellant in 1969. He said at first that he had received this amount “in that period of time” (in 1970). Later he said that it was after 1971-1972. He has no document.

3.10.13 “Dalecki” $1,100 (SN page 36)

The appellant has no document either for $1,100 which he received from a Mr Dalecki. He placed the money in a bank account. He cannot say the year when he received that amount but it was to pay a mortgage on a house he sold in 1968.

3.10.14 “Laberge” $15,000 (SN page 36)

The appellant testified that he had received about $15,000 from a Mr Laberge. For 3 years the appellant was the general manager of Mr Laberge’s business.

He said he had declared this income in his return in 1977, maybe in 1978. It seems that there was included in the said amount “some interest free loans”.

3.10.15 “Camp Sales” $4,150 (SN page 39)

The appellant sold his cottage for cash in 1972 or maybe in 1973. He also sold different items with the cottage:

According to counsel for the respondent, this total is included in the $15,215 which appears on the second page of R-1 as item “Annual Increase” and a “non-taxable capital gain” of $3,875 is deducted concerning the same item.

3.10.16 “Sudbury & Soo Tilden” franchise $21,000 (SN pages 39 & 40)

In 1975 or 1976, the appellant sold for $5,000 (but he is not sure of the amount) a franchise of a Tilden Rent-A Car in Sault Ste Marie. It was sold to the Spadoni Brothers.

In 1976-1977, he sold another franchise in Sudbury for $16,000 to Murdoch and Knight. There is no document. According to the appellant, however, this $21,000 is not income, but revenue.

According to counsel for the respondent, these items are involved in the item “Non-Taxable Capital Gains”, Exhibit R-1, page 2.

3.10.17 “Cabin Rentals” $3,000 (SN page 42)

In 1971 the appellant bought a property on the Kingsway with 10 cabins. His wife and his three daughters operated them for six years and they earned $500 profit per year. “I have a record of $3,000 that they have in equity in those cabins. They have been since demolished.”

This is not income but “revenue” according to the appellant. The money was put into the business.

3.10.18 “Christmas Trees” $800 (SN page 44)

During two years, the family (Adele, Marissa, François and Gene) purchased Christmas trees and sold them. A profit of $400 per year was made. It is again “revenue” and not income according to the appellant.

3.10.19 “Gene DVA Loans” $4,500

Gene, the appellant’s brother, made two loans through the Department of Veterans Affairs for a total of $4,500. A panel truck was purchased and was used by Gene on a paper route delivering the Globe and Mail. “We put the truck back into stock and sold it.” There was no document and no date.

3.10.20 “Claudette’s Car” $3,100 (SN page 47)

In 1971 the appellant’s wife, Claudette, sold a 1969 Impala that the appellant had purchased for her for $2,600. It seems that the profit was declared as income, probably in 1971.

3.10.21 “Insurance Policy” $2,700 (SN page 48)

It seems that the appellant, on different occasions, borrowed a total of $2,700 on life insurance policies with The Manufacturers. There was no document and no date.

3.10.22 “Mrs Corbeil’s Loan” $1,000 (SN page 48)

Mrs Corbeil, the appellant’s mother-in-law, loaned him $1,000. In cross- examination the appellant said that he borrowed the money in 1974 (SN page 68 & 69) and that he paid it back “two years ago”, that is in 1979.

3.11 With respect to the documents which he does not have, the witness said: . . when I have three jobs and seven children and a car rental agency you don’t have much time to carry around the papers and try to remember all the documentation .. .” (SN page 34 1.22 to 25).

Concerning the transactions between the members of the family, he said he never saw the necessity of documenting the transactions. “She’s my mother-in-law. She doesn’t need a piece of paper” (SN page 69, 1.27 & 28) he said about the loan from his mother-in-law.

3.12 The appellant also testified that, for 15 years, he has been the chairman of the organization for Boy’s homes. It is a charitable organization which operates five group homes for boys in the City of Sudbury.

4. Law and comments

4.01 Law

The main provisions of the Income Tax Act involved in the present case are sections 3, 9, subsections 152(7) and 163(2). They shall be quoted if necessary during the comments.

4.02 Comments

4.02.1 The first weakness in the evidence is that the appellant’s testimony is not confirmed by documents or other testimony and therefore his credibility is suspect. On that aspect it is useful to quote Mr Justice MacKay in Decker Contracting Limited v HMQ, [1978] CTC 838; 79 DTC 5001 at 848 [5007]:

The trial Judge’s conclusions are based on the inferences which he drew from the uncontested facts and his view as to the credibility of the witnesses and should not be lightly interfered with by an appellate Court. In doing so in this case I rely on the statement of Lord Wright in Powell and Wife v Streatham Manor Nursing Home 1935 AC 243 at p 267 where he said:

. . Many, perhaps most cases, turn on inferences from facts which are not in doubt, or on documents: in all such cases the appellate Court is in as good a position to decide as the trial judge.”

and the observations of O’Halloran, JA, in the case of Faryna v Chorney (1952) DLR 354 at 357 and 358, he said:

“If a trial Judge’s finding of credibility is to depend solely on which person he thinks made the better appearance of sincerity in the witness box, we are left with a purely arbitrary finding and justice would then depend upon the best actors in the witness box. On reflection it becomes almost axiomatic that the appearance of telling the truth is but one of the elements that enter into the credibility of the evidence of a witness .. .

. . . A witness by his manner may create a very unfavourable impression of his truthfulness upon the trial Judge, and yet the surrounding circumstances in the case may point decisively to the conclusion that he is actually telling the truth

The credibility of interested witnesses, particularly in cases of conflict of evidence, cannot be gauged solely by the test of whether the personal demeanour of the particular witness carried conviction of the truth. The test must reasonably subject his story to an examination of its consistency with the probabilities that surround the currently existing conditions. In short, the real test of the truth of the story of a witness in such a case must be its harmony with the preponderance of the probabilities which a practical and informed person would readily recognize as reasonable in that place and in those conditions.”

There is high authority to support the foregoing, namely, a case in the House of Lords in 1935 to which Lord Green MR, referred in Yuill v. Yuill, (1945) P 15, and described it as inadequately reported. The case was Hvalfangerselskapet Polaris A/S v Unilever Ltd (1933), 46 LI L Rep 29. In that case the trial Judge had disbelieved material witnesses and found that their evidence was invented on the spur of the moment.

In the Court of Appeal Scrutton LJ, giving the leading judgment said the trial Judge had seen the witnesses and heard the conflicting testimony and because of that it was impossible for the Court of Appeal to interfere with the trial Judge’s finding on credibility. But the House of Lords did interfere. It said that the strictures cast by the trial Judge on the two witnesses were unjustified and that the evidence of these two witnesses ought to have been received. The House, Lord Atkin presiding, came to that conclusion because it was satisfied that the evidence of the witnesses disbelieved by the trial Judge was entirely consistent with the probabilities and the business conditions proved to be in existence at the time.

Commenting on the Unilever case in Yuill v Yuill, Lord Greene said that it showed how important it is that a trial Judge’s impressions on the subject of demeanour should be carefully checked by a critical examination of the whole of the evidence, and added that, if the trial Judge in the Unilever case had done so, as was done in the House of Lords, then he could not have disbelieved the witnesses as he did.

The appellant’s explanation on that point (para 3.11) does not give the Board any better evidence. Moreover, if there are no documents to confirm his testimony, the appropriate witnesses should have appeared. In Court, the best possible evidence must be given.

4.02.2 The second weakness is the appellant’s opinion concerning “revenue” and “income” (para 3.07).

4.02.3 Following the above comments, the Board studied the points given in evidence.

4.03.1 Because of the lack of confirmation by witnesses or documents, the Board must dismiss most of the points. The only points which can be admitted are the facts described on “Storm Cyclone” (3.10.8) and “Sudbury and Soo Tilden” franchise (3.10.16). These points indeed were confirmed by documents which the respondent had on hand. However, they were taken into consideration by the respondent in issuing the reassessent.

4.03.2 There are many points which, without difficulty, could certainly be confirmed, if they were true. Among them, “Gene’s Property” (para 3.10.7): It would be easy to prove that the amounts in the bank account came from the pension received by brother Gene from the army. It is also the same for “Gambling Lions Club” (para 3.10.9), “Gene DVA Loans” (para 3.10.19) and “Insurance Policy” (para 3.10.21) etc.

4.03.3 On another aspect, even if the point “Laberge” $15,000 (para 3.10.14) is true, it cannot be considered in the present case because part of the amount was declared in each of the 1977 and 1978 income tax returns. There is no reason to think that they were not included in the right year.

4.03.4 Also on another aspect, it is clear that the $3,000 profit earned in “Cabin Rentals” (para 3.10.17), if it is true, is an income taxable in the hands of the appellant who owned the cabins.

4.03.5 The Board must conclude, despite the above comments, that the preponderance of the evidence is not in favour of the appellant and the Board must not maintain the notices of reassessment issued by the respondent concerning the additional income.

4.04 Penalties

Concerning the penalties, the respondent had to prove fraud or gross negligence on the part of the appellant (para 2.03). From the evidence, there is a complete lack of documentation and bookkeeping for the business. There is not even a payroll book (para 3.10.3). For an experienced businessman, as the appellant is, there is no doubt that there has been at least gross negligence on his part. Moreover, the additional income ($152,012.51 see para 3.03) is (275%) more than the income as filed by the taxpayer ($57,136.61 see para 3.02). The penalties must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.