Murphy Hotel Enterprises Ltd, Patricia a Murphy, Kenneth J Murphy v. Minister of National Revenue, [1981] CTC 2072, 81 DTC 60

Roland St-Onge:—The appeals of Patricia A Murphy and Kenneth J Murphy, and their company, Murphy Hotel Enterprises Ltd, came before me on August 27 and 28, 1980, at the City of Belleville, Ontario, and the issue is whether some alleged suppressed income of the company was jointly appropriated by the two shareholders with respect to the 1970, 1971, 1972, 1973 and 1974 taxation years.

The facts of these appeals are well spelled out in the reply to the notice of appeal with respect to Mr Murphy at paragraph 10, which reads as follows:

10. In reassessing the appellant in respect of the 1970 to 1974 years inclusive, he assumed as follows:

(a) The shareholders of the company were as follows:

Name	Number of Common Shares
Kenneth Murphy	2,551
Patricia Murphy (Wife of appellant)	2,447
P A Murphy (deceased)	1
Mrs V Murphy	1
COMMON SHARES ISSUED	9,000

(b) Both the appellant and his wife Patricia Murphy took an active part in the operation of the company, at all material times herein;

(c) The income of the company was suppressed in the amounts of $17,550.37, $30,845.04, $30,760.53 and $33,842.36 in the fiscal periods ending May 31, 1971, 1972, 1973 and 1974 respectively;

(d) A statement of comparative net worth of the appellant and his wife Patricia Murphy shows that the appellant and his wife were in receipt of substantial assets from an unidentified source in the period January 1, 1970 to December 31, 1973;

(e) The source of funds that enabled the appellant and his wife Patricia Murphy to increase their net worth was the suppressed income of the company as stated in paragraph (c) hereof;

(f) The suppressed income of the company was jointly appropriated to the appellant and his wife Patricia Murphy.

The alleged suppressed income of the company is calculated as follows at paragraph 4 of the reply to the notice of appeal in the Murphy Hotel Enterprises Ltd case as well as Schedules I, Il, III, IV, V and VI of said reply:

4. With respect to paragraph 6 of notice of appeal, he says that he re-assessed the appellant by notices of re-assessment that were mailed on April 10, 1975 for each of the appellant’s 1971, 1972, 1973 and 1974 taxation years, by adding in the calculation of the appellant’s taxable income for those respective years the amounts of $17,550.37, $30,845.04, $30,760.53 and $33,842.36, on the basis that those amounts were income of the appellant in those respective taxation years, being appropriated to Mr and Mrs K J Murphy, shareholders of the appellant. Those respective amounts were calculated as follows:

	1971	1972 1972			1973		1974
Net Income Previously
Assessed	$30,241.39	$12,374.13		$(16,261.00)		$( 9,816.00)
Add: Unreported Income:
‘A’ Unreported Taxable
Beer and Liquor Sales
Green Door (See
Schedule I attached)	$ 9,832.49	$11,309.66		$ 10,224.07		$11,611.90
Tropicana Room (See
Schedule ll attached)	$ 2,361.33	$11,779.40		$	6,207.58
Ernie’s Corral (See
Schedule III attached)		$	657.04	$	3,566.91	$	4,664.27
Dutch Mill Inn (See
Schedule IV attached)						$	6,239.59
‘B’ Unreported non-
taxable Draught Beer
sales (See Schedule
V attached)	$ 5,356.55	$ 7,098.94
‘C’ Unreported Bar
Revenue (See Schedule
IV attached)				$	6,674.84	$	5,296.95
‘D’ Unreported Room
Revenue (See Schedule						$( 1,214.50)
VI)				$	4,087.13	$	4,815.15
Decrease in Capital Cost
Allowance (not appealed)		$	84.02	$	80.00	$	256.00
Revised Net Income	$47,791.76	$43,303.19		$ 14,579.53		$ 24,282.36
Less 1970 Loss Applied	$3,004.99
Revised Taxable Income	$44,786.77	$43,303.19		$ 14,579.53		$ 24,282.36

MURPHY HOTEL ENTERPRISES LIMITED Quinte Hotel

Calculation of Unreported Taxable Beer and Liquor Sales MURPHY HOTEL ENTERPRISES LIMITED

	SCHEDULE I
	Green Door Room
Taxation year ended May 31, 1971
Ontario Retail Sales Tax Reported		$ 11,589.49
Multiply by factor of 10		x 10
Projected Sales		$115,894.94
Sales Reported (excluding Draught Beer Sales)		$106,062.45
Unreported Taxable Beer and Liquor Sales		$ 9,832.49
Taxation Year Ended May 31, 1972
Ontario Retail Sales Tax Reported		$ 13,518.54
		x 10
Projected Sales		$135,185.00
Sales Reported		$123,875.00
Unreported Taxable Beer and Liquor Sales		$ 11,309.00
Taxation Year Ended May 31, 1973
Ontario Retail Sales Tax Reported		$ 15,429.38
Multiply by factor of 10		x 10
Projected Sales		$154,293.82
Sales Reported		$144,069.75
Unreported Taxable Beer and Liquor Sales		$ 10,224.07
Taxation Year Ended May 31, 1974
June 1, 1973 to February 28, 1974
Ontario Retail Sales Tax Reported		$ 13,751.74
Multiply by factor of 10		x 10
Projected Sales		$137,517.35
Sales Reported		$129,044.95
		$ 8,472.40
Average Rate of Suppression June 1/73 to February 28, 1974
$ 8,472.40 x 100 = 6.57%
$129,044.95
Projected—March 1974—$16,195.27 @ 6.57%		$ 1,022.27
—April 1974 — 16,030.57 @ 6.57%		1,053.20
— May 1974	— 16,195.27 @ 6.57%	1,064.03
Unreported Taxable Beer and Liquor Sales (A-4)		$11,611.90
MURPHY HOTEL ENTERPRISES LIMITED
	Quinte Hotel
Calculation of Unreported Taxable Beer and Liquor Sales
	SCHEDULE II
	Tropicana Room
Taxation Year Ended May 31, 1971
Ontario Retail Sales Tax Reported		$ 12,219.11
Multiply by factor of 10		x 10
Projected Sales		$122,191.06
Sales Reported		$119,829.73
Unreported Taxable Beer and Liquor Sales		$ 2,361.33

Taxation Year Ended May 31, 1972
Ontario Retail Sales Tax Reported	$ 14,274.93
Multiply by factor of 10	x 10
Projected Sales	$142,749.26
sales Reported	$130,969.86
Unreported Taxable Beer and Liquor Sales	$ 11,779.40
Taxation Year Ended May 31, 1973
Ontario Retail Sales Tax Reported	$ 8,792.64
Multiply by factor of 10	x 10
Projected Sales	$ 87,926.40
Sales Reported	$ 81,718.82
Unreported Taxable Beer and Liquor Sales	$ 6,207.58
The Tropicana Room ceased operation February 24, 1973.

Quinte Hotel

Calculation of Unreported Taxable Beer and Liquor Sales MURPHY HOTEL ENTERPRISES LIMITED

		SCHEDULE III
		Ernie’s Corral Room
Taxation Year Ended May 31, 1972
Ontario Retail Sales Tax Reported			$	847.41
Multiply by factor of 10				x 10
Projected Sales			$ 8,474.10
Sales Reported			$ 7,817.06
(1) Unreported Taxable Beer and Liquor Sales			$	657.04
Taxation Year Ended May 31, 1973
Ontario Retail Sales Tax Reported			$ 5,070.28
Multiply by factor of 10				x 10
Projected Sales			$50,702.83
Sales Reported			$47,135.92
Unreported Taxable Beer and Liquor Sales			$ 3,566.91
Taxation Year Ended May 31, 1974
Ontario Retail Sales Tax Reported 1/6/72 to 28/2/74			$ 4,394.08
Multiply by factor of 10				x 10
Projected Sales June 1/73 to February 28/74			$43,940.80
Sales Reported June 1/73 to February 28/74			$40,590.85
			$ 3,349.95
Average Rate of Suppression June 1/73 to February 28/74
$ 3,349.95 x 100	8.25%
$40,590.85
Reported Sales—March 1974 @ 8.25%			$ 448.05
—April 1974		@ 8.25%	$ 430.05
— May 1974		@8.25%	$ 436.22
Unreported Taxable Beer and Liquor Sales (B-4)			$4,664,27

Dutch Mill Inn

Calculation of Unreported Bar Revenue

		SCHEDULE IV
		Dutch Mill Inn Bar
Basic Calculation
Average Rate of Suppression August 8, 1973 to February 28, 1974
$ 6,239.59 x 100 = 5.14%
$121,340.09
Taxation Year Ended May 31, 1973
Reported Sales $129,860.70 @ 5.14%			$ 6,674.84
Taxation Year Ended May 31, 1974
August 8, 1973 to February 28, 1974
Ontario Retail Sales Tax Reported			$ 12,757.97
Multiply by factor of 10			x 10
Projected Sales			$127,579.68
Sales Reported			$121,340.09
			$ 6,239.59
Reported Sales—June/73 — $21,874.31 @ 5.14%			$1,124.33
—July/73 — 22,950.05 @ 5.14%			1,179.62
—Aug 1 to
7/73	—	5,069.36 @ 5.14%	260.56
— March/74— 19,568.02 @ 5.14%			1,005.79
—April/74 — 13,796.17 @ 5.14%			709.12
— May/74	— 19,796.40 @ 5.14%		1,017.53
			$5,296.95

MURPHY HOTEL ENTERPRISES LIMITED

Quinte Hotel

Calculation of Unreported Non-Taxable Draught Beer Sales MURPHY HOTEL ENTERPRISES LIMITED

SCHEDULE V
Green Door Room, Tropicana Room, Ernie’s Corral Room
Basic Calculation
Total Reported Sales June 1 to September 30, 1972	$107,678.03
Suppressed Sales June 1 to September 30,1972	10,344.37
Percent that Suppressed Sales is of Reported Sales
$ 10,344.37 x 100 = 9.61%
$107,678.03
Taxation Year Ended May 31, 1971
Reported Draught Beer Sales $55,739.40 @ 9.61%	$ 5,356.55
Taxation Year Ended May 31, 1972
Reported Draught Beer Sales $7,098.94 @ 9.61%	$ 7,098.94

Dutch Mill Inn

Calculation of Unreported Room Revenue

Dutch Mill In Rooms

SCHEDULE VI

Basic Calculation

Average Rate of Suppression

Room

Revenue

		per Cash	Room
	Number of	Register	Revenue
	Days	Tape	Reported	Suppression
December 1973	31	$ 3,718.18	$ 3,416.18	$ 302.00
January 1974	31	3,679.50	3,380.00	299.50
February 1974	28	4,256.40	3,887.02	369.38
March 1974	18	2,943.50	2,699.88	243.62
		$14,597.58	$13383.08	$1.214.50
$ 1,214.50 x 100 = 9.07%
$13,383.08
Fiscal Year Ended May 31, 1973
Room Revenue reported October, 1972 to
May 31, 1973			$45,062.00
Projected Suppressions
October 1, 1972 to December 31, 1972—
$45,062.00 @ 9.07%				$4,087.13
Fiscal Year Ended May 31, 1974
Room Revenue Reported			$66,472.00
Less: Room Revenue on which suppression is
documented			13,383.08	$1,214.50
Reported Room Revenue on which suppression is
not documented			$53,088.92
Projected Suppression
$53,088.92 @ 9.07%				$4,815.15

The appellant, Mr Kenneth J Murphy, testified but did not introduce any evidence to refute the respondent’s figures with respect to the unreported beer and liquor sales for the years under appeal. On the contrary, there is ample evidence to show that the Minister was right in reassessing the appellants as he did for the following reasons:

(1) The Minister resorted to the retail sales tax paid by the company to the Province of Ontario to discover that some substantial unreported

beer and liquor sales were effectuated;

(2) The appellant, Mr Murphy, destroyed all the cash register tapes that could have allowed him to find out the accurate amount of sales for the years in dispute;

(3) Mr Murphy did not want to allow his employees to count the cash and compare it with the cash register tapes. In this way, nobody would know the amount of income received;

(4) The appellant testified that there were many periodic discrepancies between the cash and the cash register tapes which resulted in cash losses, but this argument is not valid since the appellant did not allow his employees to prove that all the money was remitted to the principals;

(5) As to the room revenue reported, the Minister was able to file as evidence some cash register tapes for the month of June 1972 which were seized by the respondent’s investigator at the office of the appellant’s accountant and which indicate that every two days, some $50 was taken out in cash when the appellant’s wife was making her report for income tax purposes;

(6) There were many other documentary evidences to corroborate what might have been the suppressed income of the company for the years under appeal, such as cash register tapes found in the appellant’s office waste-basket, documents remitted by Mr Smith, a 20-year company employee, to Mr Carson who investigated the affairs of the appellant company;

(7) When the method of percentage was utilized to determine the percentage of suppressed sales, Mr Carson testified that there was direct evidence to prove suppression of sales;

(8) The Board was greatly impressed by the testimony given on cross- examination by Mr Carson who was able to explain how he proceeded in trying to find out the suppressed income of the appellant company;

(9) The explanations given by Mr Murphy, such as theft by employees and sale of employee-owned products in the hotel cannot be seriously considered by the Board;

(10) The net worth statement of the shareholders was just an attempt to corroborate the appropriation of funds by them (the shareholders) and is not essential to the respondent’s case. The said suppressed funds could have been spent by the shareholders during this four-year period;

(11) There are too many vague answers in Mr Murphy’s testimony to enable him to discharge the onus.

All this evidence is sufficient for the Board to decide that some substantial amount of income was suppressed by the company, Murphy Hotel Enterprises Limited, and that this income was jointly appropriated by the two shareholders with respect to the 1970 to 1974 taxation years inclusive. In a nutshell, Mr Murphy’s evidence was not convincing enough, not even to allow the Board to reduce in some way the amount of suppressed income of the company. Under the circumstances, the Board has the disagreeable duty of dismissing the three appeals without being able to reduce the amount of suppressed income of the company which was jointly appropriated by the two shareholders of the company. In short, the appellants did not succeed in showing that the Minister’s assessments were wrong In fact and in law.

Consequently, the three appeals are dismissed.

Appeals dismissed.