King Lee, Bic Lee v. Minister of National Revenue, [1982] CTC 2621, 82 DTC 1638

D E Taylor:—These are appeals from King Lee and Bic Lee, husband and wife, with respect to additional funds added by the Minister of National Revenue to their incomes for the years 1973, 1974 and 1975. In the assessments at issue, the Minister took the position that the two appellants were in partnership in the herbalist business, a business which was originally considered by the Minister to be that of King Lee the husband, alone. King Lee had traditionally filed his own income tax returns related to that business operation and, as I understand the matter, tax returns had not been filed by his wife Bic Lee. Nevertheless, in the end analysis, the funds in question in these appeals were apportioned equally between the two parties.

The Minister’s position in the matter, in general terms (taken from the Reply to Notice of Appeal) can be summarized in this way: The financial affairs of the appellant — and where I say appellant it may well be appellants

— were audited for the years under appeal. During the course of the audit the appellant’s financial records as well as those of his business were found to be incomplete and, due to these circumstances, a net worth statement for the appellant was prepared to establish his income and assets. It is my understanding that the net worth statement so prepared was not prepared at the behest of or at the initiative of the appellants, but was prepared by and under the auspices of the Minister of National Revenue. The amounts of $27,763.46, $63,670.16 and $17,503.06 were added to the taxation years under appeal and after taking into account the income which had been reported and certain adjustments over that period of time, the ultimate amount at issue became $40,000 distributed in an appropriate manner (at least in a manner about which I have heard no major complaints) over those three years at issue.

From the Notices of Appeal the explanation provided by the appellants can be summarized in this manner:

In 1973, 1974 and 1975 the spouse of the appellant (who was Mrs Bic Lee) received sums of money aggregating $40,000 from Mr Law Koon Bun, or Mr Law as he is known, a resident of Hong Kong. Such sums were received by Mrs Lee as the agent or trustee for Mr Law.

The respondent has assessed the appellants on the basis that one-half of the aforesaid sum of $40,000 represents unreported income of each partner, and the Minister has included $20,000 as unreported income of the appellants distributed over the years 1973, 1974 and 1975. It was agreed at the outset of the hearing that the matter would be heard on common evidence. It was also noted by the Board that in the assessments in question the Minister had imposed penalties on the assessments of tax, and counsel for the Minister pointed out to the Board that these penalties were being dropped by the Minister and were not in issue. Therefore, this decision relates specifically and entirely to the $40,000 in question which has been mentioned.

The matter is one of strict credibility. The testimony for the appellants consisted of that of Corinna Lee, daughter of the appellants; Bic Lee, one of the appellants and wife of King Lee; Dick Lee, a son of the appellants; and a Mr Poon, chartered accountant. For the Minister the witnesses were two — Mr Lawless and Mr Barnett, who were involved at the relevant times with the audit and the investigation for the Minister.

Turning first to the evidence of Dick Lee, it has no bearing at all on the point at issue. The mother, Bic Lee, handled all the money and, accordingly, no relationship can be made with regard to Dick Lee’s comments or knowledge on the matter at issue, or the source of the funds at issue, other than that explanations had been translated to the auditors for Revenue Canada by Dick Lee. There are certain comments with respect to his testimony however which are illuminating, and there were substantial inconsistencies and an enormous amount of vagueness in his testimony. Among other things, there is no explanation as to how he could have accumulated sufficient funds for his personal 12 /2% investment in a corporation called “Unity Holdings”, which was a corporation largely owned by the appellants. If indeed he did so, then that amount compares with the 12 /2% interest in the same corporation held by Mr Law (whose name has been mentioned earlier) and which was apparently the equity gained by Mr Law from his investment of the $40,000 at issue in this appeal. The $40,000 amount of Dick Lee is quite separate from the amount at issue in the appeals, as I understand it. Whether or not there should be an explanation with respect to Dick Lee’s $40,000 may be questionable, but it leaves me with a serious concern regarding Dick Lee’s comrehension of the matter at issue, when his alleged investment in Unity is comparable to the funds which are at issue here today.

With regard to Corinna Lee, Corinna may have brought in some money, a minor amount of money, and I am generally inclined to think that she did so. However, it is my view that it was not $10,000 in a plain, unsealed, white envelope, as she indicated. She did not say it was exactly $10,000 in $100 Canadian bills, which is what her mother Bic Lee, one of the appellants, did say later on. There are other serious inconsistencies between the stories of Corinna Lee and Bic Lee. But, in general terms, I believe that Corinna Lee was attempting to provide her present recollection of it. In my opinion she simply does not know and did not know how much money, if any, that she brought into the country in 1973, which is the basis of her testimony.

At this point I should note that Mr Poon, a chartered accountant, was not involved in the matter or with the appellants during the relevant years in question, and had no personal knowledge of the point at issue nor of the $40,000 in question. However, even though I have noted Mr Poon’s non-relationship with this issue, the appellants did not even bring Mr Poon in to assist them in the matter during the Revenue Canada audit. At the same time he was directly involved with one of their major affairs, the corporation known as Unity Holdings into which, it is alleged, the funds at issue did go. In addition, Bic Lee did not bring a certain Mr Peterson who had been the accountant during the relevant years, as a witness to the hearing.

The matter finally comes down to the question of the credibility of Bic Lee. I am satisfied that Mrs Bic Lee’s testimony cannot be accepted as credible at all. And I am satisfied of that on certain grounds. First of all, it is my view that she understands and in fact speaks English, although she contended that she was unable to do so. A major part of the clientele of the herbalist business were English, English-speaking at least. There is the evidence of Mr Lawless, one of the Minister’s witnesses, and again at least one conversation with the other Minister’s witness Mr Barnett, that she spoke English to them. In addition she had been in Canada a long time, and had been in business a long time. I might also comment on her evidence that in China she was a teacher. She was rather specific with regard to this matter, in answer to questions by counsel for the Minister. That particular information was directly contradicted by Dick Lee. Mrs Bic Lee knew of the tax problems involved and, during the years in question, due to an illness of Mr King Lee, the other appellant, was in my view totally in charge of the affairs of this business. She did not bring her daughter Corinna into this matter at all until very recently. Certainly during the times in question, to whatever degree Corinna’s testimony might have been helpful, it was not provided in 1977 or 1978 to the Revenue Canada auditors when they might have taken it into account.

I add the following general observations. The taxation system in Canada is a voluntary, self-policing, income tax filing system. In the final analysis it is the responsibility of any taxpayer, whether in business or not, to maintain records which will support his voluntary declaration when he is challenged by the Minister so to do. Where a taxpayer is in business, that responsibility is even more accentuated because that business taxpayer is deducting certain amounts for alleged expenses against some form of gross income. In the instant matter the taxpayers have totally forsaken their obligations and, if indeed the result is that there are any amounts upon which they are taxed in the net worth assessment for which they might not deserve taxation, then that fault rests on their shoulders and it is not a problem for the Department of National Revenue. The Minister, not only in the audit and the investigation, but also in the presentation of the case at the hearing, has been fair, generous and considerate. Counsel for the Minister at the completion of the presentation and evidence for the appellants, considered but decided against making at that time a motion for dismissal, presumably based on the view that the appellants had not discharged the onus of proof upon them. Counsel, in a most conscientious manner, however, did expose the Minister’s witnesses to the hearing and provided the utmost opportunity for questioning of them by both counsel for the appellants and the Board.

There would be little reason for any taxpayer in Canada to follow the prescribed formats and Regulations in the Income Tax Act if the taxpayers in these appeals could simply present themselves at the hearing of an appeal (and in fact only one of the two has done so even though an interpreter was available), and swear that the discrepant funds at issue had simply arisen from some alleged, unsupported source. To have the Board accept that kind of testimony would be a contradiction of the evidence and testimony of the Minister’s witnesses, and would make the tax system appear a farce to other taxpayers. The Minister had no responsibility in this matter whatsoever to disprove that which was offered at any time as an explanation by the appellants. The Minister’s only concern might be an attempt to verify if those explanations might be supported. When that attempted verification does not stand up under such scrutiny, and it did not in this case, the Minister has more than fulfilled his responsibility to the taxpayer.

The appeals are dismissed.

Appeals dismissed.