DR Earl Lerner v. Minister of National Revenue, [1981] CTC 2040, 81 DTC 29

Roland St-Onge:—The appeal of Dr Earl Lerner came before me on October 30, 1980, at the City of Montreal, Quebec, and has to do with penalties with respect to unreported income and disallowed expenses in his 1973, 1974, 1975 and 1976 taxation years.

The facts of this appear are well spelled out in the notice of appeal at paragraphs 1 to 15 inclusive, which read as follows:

1. For the years in question the taxpayer was assessed for unreported income for various disallowed expenses.

2. The taxpayer agrees that he indeed did not report the full amount of his income and that he will pay the relevant tax thereon. In addition, he does not object to the expenses which have been disallowed.

3. With respect to all taxation years in question, the taxpayer was assessed penalties under subsection 163(2) of the Act. It is with respect to these penalties that the taxpayer wished to appeal to the Tax Review Board.

4. For the years in question the taxpayer personally deposited cheques that were for his practice to a separate chequing account. Often the taxpayer would deduct various cash amounts from the deposits so that only the net amount (total of cheques less cash withdrawals) was deposited in this special account.

5. On other occasions, when the taxpayer felt that his balance in this special account was enough to cover his expenses, he would deposit cheques from his professional practice directly into his savings account.

6. In the years in question, the taxpayer also transferred monies from his savings account to his special account when the funds were required in the special account.

7. Twice a year the taxpayer would send the bank statements for the special account to his accountant. Included with his bank statements were the cancelled cheques that were drawn on the account.

8. The accountant would review the bank statements and would aggregate the deposits shown on the statements to arrive at the taxpayer’s gross professional fees. The accountant would then review the cancelled cheques to determine which expenses were professional and which were personal. Accordingly, each year the taxpayer’s ‘net professional income’ was determined.

9. The accountant is a personal friend of the taxpayer and always noted that the net income after tax of the taxpayer (as computed by him) was sufficient to satisfy his standard of living.

10. Each year the taxpayer submitted the bank statements for the special account to his accountant and was totally unaware of the fact that his cash withdrawals or deposits directly to his savings account were not being reflected in his gross income. (Conversely the transfers from the savings account to the special account were picked up as income.)

11. For the years in question, the unreported amounts were small in comparison to the total gross of the taxpayer and therefore he had no reason to doubt that the net figures as reported were incorrect. The following is a listing of the percentage of the unreported amounts to the total billings:

1973	13.5%
1974	4.3%
1975	6.25%
1976	11.7%

12. When the taxpayer was first confronted by the Tax Department, he immediately confirmed that he was making deductions from his deposits prior to depositing his gross professional fees in the special account.

13. Clearly, if the taxpayer had wished to willfully understate his income, he would never have placed all of his gross professional fees on a bank deposit slip and then deduct his current withdrawals on the slip. In addition, the taxpayer would never have redeposited amounts from his savings account back to the special account.

14. It is submitted that the taxpayer did not “knowingly or under circumstances owing to gross negligence’’ make any misstatements as to his income. It is admitted that there was some lack of communication between the taxpayer and his accountant, however since the amounts involved were not material, he had no cause to suspect that the methods being used were not correct.

15. It is submitted that the taxpayer was not “grossly negligent” within the meaning of the jurisprudence. Reference is made to the following cases:

Penn v MNR, [1971] Tax ABC 33.

Morgan v MNR, [1973] CTC 2192.

Udell v MNR, [1969] CTC 704.

MNR v Weeks, [1972] CTC 60.

Paragraphs 1 to 8 inclusive as well as paragraphs 8 to 12 inclusive and paragraph 15 of the reply to notice of appeal are admitted. In addition, I consider as proven paragraph 13 of the reply.

Indeed, the appellant testified that he withdrew cash monies from his practice whenever he needed money whether for personal expenses or to deposit it in his savings account. The deposit slips were in his bankbook which he retained in his office but, at the question of counsel for the respondent, he testified that he could not find these slips today. He did not provide the accountant with these slips because the latter did not require them.

On cross-examination, he stated that he had three employees but none of them had to do the bookkeeping.

Mr Morton Ptack, the appellant’s accountant, testified that he knew about the existence of the savings account but he did not know that the appellant was depositing money from his practice to this savings account. He did not request the deposit slips because, according to his testimony, his duty was only to prepare a non-audited income tax return.

I would like to quote Exhibit 5 to show the unreported income, the revied total income and the percentage:

The Board was not impressed by the appellant’s nor by his accountant’s testimony.

The appellant showed a tremendous lack of seriousness and a very great carelessness when the time came to give the information to his accountant. After all, he is a doctor and it is inconceivable that an educated man like him would proceed the way he did. His conduct during the four years under appeal amounts, without a doubt, to gross negligence.

Consequently, the appeal is dismissed.

Appeal dismissed.