William a Fulcher v. Minister of National Revenue, [1982] CTC 2198, 81 DTC 569

D E Taylor:—This appeal was heard in Vancouver, British Columbia, on May 7, 1981. The facts upon which the parties were in agreement included:

— The appellant is a self-employed plumbing contractor.

— He did not file income tax returns for the years 1973 to 1976.

— By arbitrary assessment the respondent determined the appellant’s taxable income for the years in question to be as follows:

1973	$12,827.00
1974	14,848.59
1975	2,224.54
1976	12,624.27

— By Notices of Assessment dated July 13, 1978 the respondent levied, inter alia, penalties under section 163(1) of the Federal Income Tax Act and section 19 of the BC Income Tax Act.

It was the contention of the agent for the appellant that:

Subsection 163(1) provides for a penalty of 50% of the amount of the tax sought to be evaded in the case of a person who “wilfully” attempts to evade payment. The term “wilfully” as used in subsection 163(1) comprehends the conscious and deliberate formation of an intent to do an act with the full knowledge that the act in question is unlawful.

In response, the Minister submitted that the appellant wilfully attempted to evade tax payable for each of the years under appeal by failing to file an income tax return as and when required by subsection 150(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and that accordingly penalties were properly imposed under subsection 163(1). The respondent relied, inter alia, upon subsections 150(1), 152(7) and 163(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and section 19 of the Income Tax Act, c 27, SBC 1962 as amended.

Witnesses for the Minister outlined the efforts to have the appellant produce the income tax returns, and their general failure in this endeavour. Demands to file tax returns as provided for in subsection 150(2) of the Act were served on the appellant for the years 1973, 1974 and 1975. None was served on him for the year 1976. Evidence was also entered by witnesses for the respondent that the appellant had been charged and convicted for the years 1973 and 1974 under subsection 238(1) of the Act with failing to file the demanded returns. No evidence of similar charges or convictions was presented for the years 1975 or 1976. The appellant had regularly filed income tax returns for the years before 1973, but he provided certain reasons to the Board which he believed accounted for the fact that he had not filed the required tax returns during the years under review. Primarily, his excuse was that he was uncertain of his exact income since some accounts receivable had not been collected, and that he did not have the funds required to pay an accountant to do the necessary work. He was not positive that there would have been income tax to pay — but assumed there might have been. He believed that he had the funds available to pay the tax on time (if he had filed the returns). In other words, the lack of funds itself did not prevent or inhibit the proper filing. No explanation was provided by him for the contrast between not having the funds to pay an accountant, but having the funds to pay the tax.

Counsel for the respondent in argument put forward that if the result of such non-filing was even a “temporary evasion” of tax payable, the requirement of subsection 163(1) of the Act had been met and a penalty was justified.

First, I would note that the summary convictions under subsection 238(1) of the Act have no direct bearing on the issue before the Board in my opinion. The “criminal” section which corresponds to subsection 163(1) is subsection 239(1), not subsection 238(1) of the Act. However, they do corroborate that he had not filed the returns for 1973 and 1974 under subsection 150(1), but was required to do so under subsection 150(2) of the Act. The significance of this point was made in Gary P Sorenson v MNR, [1981] CTC 2601; 81 DTC 499. The “temporary” argument was made by the appellant in Sorenson (supra) and rejected there by the Board. There is no reason herein to accept it from the respondent. As noted in Sorenson, “wilfully” in the relevant section of the Act does have some clear implications in connection with the Minister’s responsibility.

I am quite satisfied that Mr Fulcher was fully aware that by not filing voluntarily, he was contravening the provisions of subsection 150(1) of the Income Tax Act for all the four years under appeal. I am also satisfied (see Sorenson (supra)) that failing to file under subsection 150(1), and the demands to file under subsection 150(2) of the Act made by the Minister, fulfill the prima facie requirement under subsection 163(1), as an attempt to evade tax for the years 1973, 1974 and 1975. For the year 1976, the Minister cannot rely upon subsection 150(2) since there was no demand to file, and no equivalent evidence was introduced for that year to show that an attempt had been made to evade tax. It remains therefore for the Minister to show that this taxpayer knew or should have known that tax was payable — in connection with the three remaining years. The Minister’s evidence on this point came from a Mr Batton, an officer with Revenue Canada involved with the preparation of the net worth assessments which formed the basis for the assessment of tax which was not at issue, and the imposition of the subsection 163(1) penalties which were at issue. A direct quotation during the cross-examination of Mr Batton by the agent for the appellant deals precisely with this point:

Q In the time when you were speaking with Mr Fulcher, did he seem at all cooperative?

A Yes, he was co-operative, after he decided to make a phone call.

Q Yes, but —

A Well, it took him eight days to return my phone call after various attempts, he was either just gone out to the garage, he would be coming back in, he would be phoning in ten minutes, I would not receive a phone call. I would phone him in the evening, he would not be in; I would phone him in the morning, he was not available and I, after conveying a message to one of the family members that I thought again had gone on long enough and I requested a phone call immediately, I received a phone call.

Q Yes, but he did eventually call back?

A Yes, he did call back after I thought the game had gone far enough.

Q You mentioned that when you have prepared these arbitrary assessments that there was no — neither concurrence nor objection, did he seem to understand what they were all about or what you had done on these things?

A Well, I tried to contact Mr Fulcher and after they were all done and there was no answer at his home after three occasions, so I contacted his sister-in-law, the wife of his employee, a family member and they advised me that he had left for Disneyland for . . . from the Christmas holiday and I then mailed the returns over to him with a note to set up the payables and if there was any questions to contact me.

Q But you didn’t really speak with him after these assessments had been made?

A I was not able to contact him.

Q In the time you were going through the material, out of the material that he had, was there anything that he was unable or unwilling to provide for you?

A As far as the records of the plumbing business were concerned, he provided all records. He had a Beachcomber boat whch he rented to a towing company or a gentleman who was involved in log spills and log salvage and he advised me that on January 19th, ’77, he had disposed of his boat and received $5,000 and advised me that these funds were available in the Vancouver City Credit Union, and he gave me authority to check this out.

While doing an audit on another Beachcomber two years later, I found out this Beachcomber had purchased the boat from Mr Fulcher and had paid $10,000 for the boat and had received — had paid a $5,000 cheque and $5,000 cash.

Q Did you question this other Beachcomber further?

A I saw his records.

Q With this, the sale of this boat, now has there been any pursuit of the matter of income from the boat prior to his mention that he had sold this boat?

A There was frequent deposit slips of monthly income coming in for the boat which was classed as income.

Q Did it seem otherwise that there was any attempt to conceal the income?

A Well, I really don’t think Mr Fulcher knew whether he was in the position to conceal any income or not because he stated that he did not like paperwork and didn’t pay too much attention to it and whatever was there was there. So I couldn’t say whether he tried to conceal anything or not.

Q So in other words, you’re suggesting he’s incapable of forming that . . .

Mr Heinrich: With deference, Mr Chairman, what Mr Fulcher is capable of and not capable of is not within the purview of this particular witness. He can only attest to the facts as he saw them, not read the mind of Mr Fulcher.

The Chairman: The Minister has alleged that Mr Fulcher’s failure to file tax returns is the basis for the 50 percent penalty and I fully appreciate that the last answer that this witness gave may be to some degree speculation, and I take that into account and recognize that it may be his opinion.

Nevertheless, Mr Heinrich, the Minister has proffered this man as a witness for the Minister’s case and I will only protect him so far.

Mr Heinrich: Well, if I might speak to that.

The Chairman: Very quickly.

Mr Heinrich: Well, Mr Chairman, we have proffered Mr Batton as a witness for the Minister to attest to the facts as he saw them. Now what we have also alleged, okay, that based on those facts as he saw them, we take the position there was a wilful intent to evade, all right?

Now, that is something entirely different than to have Mr Batton or myself or anybody say well, in this witness’ mind, there was a certain intent. One infers intent from facts and circumstances of surrounding an event. One does not infer I submit, intent from, as you put it, Mr Chairman, speculation as to what someone thought.

The Chairman: I think it’s pretty clear that this witness arrived at the conclusion that his observations were that Mr Fulcher didn’t know whether he was in a position of being taxable or not. Now that’s what he said. Now, I have no evidence that that’s the case and I leave that up to you to prove and I do request Mr Saintonge that you don’t pursue that right to the bone because I’m fully conscious of how sensitive a subject that is. But in these matters, Mr Heinrich, when the Minister has a responsibility and has dug extra deeply into the pockets of the taxpayers, then I also want to know how it is that the Minister’s officials have arrived at these conclusions. It’s very likely on many occasions that if counsel for the appellant doesn't ask the questions, I ask them myself. So I’m not protecting them very much.

The conclusion is obvious — there is neither evidence nor testimony from the Minister which would support a conclusion by the Board that the taxpayer was aware or should have been aware that tax was payable. The Board is fully conscious of the fact that it would be difficult indeed for Mr Fulcher to overlook net income of more than $40,000 during the four years

— but it would not be impossible. The fact that he has not challenged the amount of tax itself at the appeal, under these circumstances, cannot in itself be regarded as proof of such knowledge or its acceptance, at the relevant filing dates for each of the years in question. The Board has noted on previous occasions the difficulty of the task facing the Minister to impose penalties based upon an arbitrary assessment of tax which, in itself, was based upon a net worth comparison of a taxpayer’s affairs. (See Peter Raws- thorne v MNR, [1981] CTC 2187; 81 DTC 116.)

Decision

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.