Gordon Holden v. Minister of National Revenue, [1981] CTC 2016, 81 DTC 27

John B Goetz:—This is an appeal by the appellant with respect to his 1971 to 1976 taxation years inclusive, whereby the appellant was reassessed for those taxation years by way of a net worth assessment and also penalties were levied. Mr Holden objected to the assessment as well as to the penalties.

In assessing the appellant, the respondent relied, inter alia, upon sections 3, 4, 46 and 56 of the Income Tax Act, RSC 1952, c 148, as amended, and sections 2, 3, 4, 9, subsections 152(7) and 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Facts

The appellant was an extremely successful farmer and farmed a large acreage in partnership with his son who received 10% of the proceeds of the income from the farming operations. The farming operations consisted of feeding, general farming operations and seed combination.

In filing his tax returns he showed his total income to be as follows for the following taxation years:

The respondent, on the other hand, increased the appellant’s total income by the following amounts for the following years:

The seed operation also included the cleaning plant and there was a vast amount of equipment owned and used by the appellant. His son used an airplane in the operation of their farm.

In 1968 a net worth assessment was made upon the appellant whereby because of the combination of seed, cleaning and general farming operations this net worth assessment recovered extra taxes for the respondent and at this point in time the appellant was warned by the respondent’s inspector that his records were very very poor and a lot of assets could not be accounted for. He was advised to keep better records in the future.

Evidence

The evidence shows very clearly that the appellant kept very poor, inadequate and incomplete records which were insufficient for proper determination of this taxable income. As a result the respondent performed a net worth assessment on the appellant and added additional income which he had not reported in his tax years in the following amounts:

These figures were supported by 27 exhibits attached to the reply to notice of appeal covering the whole of the appellant’s operations for the relevant taxation years, showing all of his personal and farm assets. The audit was made by an accountant by the name of Brian Strong who had been the field auditor for the Department of National Revenue. He audited the appellant’s operations in the spring of 1977. It was a very large operation involving equipment, seed mill, grate drivers, buildings, machinery, sheds, etc. There were three housholds on the property, two of which were lived in by the appellant and his wife and three of his children, one for his sister and one for his son and wife (which was new and almost completed). The appellant filed a letter form M M Colquhoun, Esq indicating the balance available from one Joseph Cummings in the amount of $3,427.44. This letter was dated May 21, 1971, and was accompanied by a statement of account of the same date. It is interesting to note that this exact amount of $3,427.44 was deposited on May 27,1971. This information comes from a bank deposit book filed by the appellant. There was no evidence filed of the actual mortgage and the appellant’s explanation said that it was discounted. Although the field auditor spent over 100 hours attempting to obtain the appellant’s net worth, the mortgage receivable mentioned above was never mentioned until the audit in 1977.

Through the years the appellant availed himself of the accounting services of H & R Block and used their working forms to complete information necessary for them to file his returns plus handing them cancelled cheques and whatever receipts he felt like. Between 1971 and 1974 there was an income discrepancy of over $55,000 less the mortgage hereinabove referred to, and Holden’s exact words with regard to this were: “We haven’t any explanation”. It is interesting to note particularly in the income tax return filed by the appellant in 1973 where he reports a total income of $26,000 whereas the net worth increase, after proper assessment by the respondent, indicated that his income increase was in actual fact $31,535.59. His only explanation for this was that: ‘‘His expenses were out of line”. He signed all the returns after looking at them and had the temerity to say that he did not think that after perusing the returns anything was wrong with them.

The appellant frankly stated that he made no effort to make a preparation of his own net worth statement in preparation for this hearing. In 1977 the field auditor, in initiating his net worth assessment, found boxes with invoices, many impossible to read, a good number of them chewed and torn up. He had not at that time planned to go back farther than 1975 because at that point in time the appellant had turned over his accounting to a computer service with his Bank. This indicated large discrepancies between the computer print out and the tax returns for 1974 and 1975.

The field auditor contacted a Mr Honeymon who had been doing the appellant’s income tax returns for several years. Mr Honeymon indicated that the appellant would only bring in sheets of paper with figures with no backup material. It was suggested by the appellant that the total discrepancy related to capital cost allowance for the years 1971 to 1974 inclusive, in the amount of $94,000. Even allowing Mr Honeymon’s suggestion of this discrepancy after allowing the appellant a capital cost allowance for four years, there was still a $50,000 discrepancy.

Findings

Subsection 152(7), which reads as follows, permits the Minister to make an assessment notwithstanding a return or information supplied in a return which quite often results and justifies arbitrary “net worth assessments”:

(7) The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed assess the tax payable under this Part.

No attempt by the appellant was made to show that his living expenses were lower than those assumed by the Minister. Having regard to the reverse onus in Johnston v MNR, [1948] CTC 195; 3 DTC 1182, in the present case the respondent did indeed, with all the exhibits attached to his reply to notice of appeal, give the appellant full particulars of the basis of his reassessments.

As can be seen, the discrepancies between the declared income of the appellant for the relevant years and that which was actually found to be the true income, pursuant to the net worth assessment by the respondent, is, to say the least, dramatic. I should like to cite with approval the decision of my learned colleague, M J Bonner, Esq, in Murray Lorentz v MNR, [1979] CTC 2044, 79 DTC 83, where at 2046 and 86 respectively, he cites with approval the findings of the Federal Court in Chernenkoff v MNR, [1949] CTC 369, 49 DTC 680:

The proper approach in a case such as this is to be found in the following passage from the reasons of Cameron, J, in Chernenkoff v MNR, (supra), a passage cited with approval by Jackett, P (as he then was) in Elchuk v MNR, [1970] CTC 326; 70 DTC 6235;

In effect, the appellant agrees that the ‘‘net worth” computation of her income is a satisfactory basis for arriving at her taxable income, but that some of the items—those which I have indicated—are wrong. When these are corrected in accordance with the evidence adduced—so she states—the result is that there is no taxable income for any of the years in question.

My opinion is that the appellant must do far more than she has attempted to do here if her appeal is to be successful. There can be no question that the onus lies on the appellant and that, in my view, means that she must establish affirmatively that her taxable income was not that for each of the years for which she was assessed. Two courses were open to her. The first being to establish her income with proper deductions and allowances, and that course could quite readily have been followed.

In the absence of records, the alternative course open to the appellant was to prove that even on a proper and complete “net worth” basis the assessments were wrong. But that also she has failed to do.

Even though the taxpayer, entrusted the preparation of the returns to his accountants, he, (the taxpayer) was the one who provided all of the information for the accountants to use in preparing the appellant’s income tax returns. The low incomes should, most assuredly, have been noticed by the appellant. I find him grossly negligent in his reported income in that they were so substantially less than those which he actually earned. I also hold him grossly negligent in operating such a large business without keeping all proper documents and records necessary for the preparation of financial Statements and income tax returns.

For the above reasons, the appeal is dismissed.

Appeal dismissed.