DR Gerard Lemieux v. Minister of National Revenue, [1981] CTC 2092, 81 DTC 144

Guy Tremblay [TRANSLATION]:—This case was heard on September 21, 1979 in Montreal, Quebec.

1. Points at Issue and Burden of Proof

1.1 The first point at issue is whether the respondent was entitled to issue notices of reassessment on October 4, 1976 for the years 1968, 1969 and 1970 when the original assessments for those years had been issued more than four years earlier.

It is the responsibility of the respondent to establish that in filing his tax returns for the years in question the appellant made a misrepresentation that is attributable to neglect, carelessness or wilful default as specified in Subsection 152(4) of the Income Tax Act.

1.2 If the respondent succeeds in establishing this first point, the second point at issue is whether the notices of reassessment, as amended by the additional notices issued on June 22, 1978, are well-founded in fact and in law. These notices of assessment imposed on the appellant the following penalties and additional taxes:

The burden of proof with respect to the additional taxes falls on the appellant in accordance with, among other things, the decision handed down by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

The burden of proof with regard to the penalties assessed under subsection 163(2) of the new Income Tax Act, on the other hand, falls on the respondent in accordance with subsection 163(3) of the new Act and subsection 62(3) of the Income Tax Application Rules, 1971 (ITAR).

2. Facts

2.01 According to the respondent, during the years 1968, 1969 and 1970 the appellant practised surgery in various places in the province of Quebec. The respondent produced as exhibits 1-1, I-2 and I-3 the appellant’s tax returns for those years and the various notices of assessment that were issued.

2.02 After the returns were filed, the respondent issued a first assessment for each of the three years. Following an investigation by the respondent’s auditors in 1975 the first notices of reassessment were issued. Finally, after discussions with the appellant, the respondent issued the second notices of reassessment. The dates on which the returns were filed and the various notices of assessment were issued are as follows:

2.03 The gross income (GI) and taxable income (Tl) concerned in the first notices of assessment (FNA), the first notices of reassessment (FNR) and the second notices of reassessment (SNR) are as follows:

2.04 Mr André Houle, a witness for the respondent, testified that he had carried out the investigation and had issued the first notices of reassessment on October 4, 1976. He explained that he had decided to audit the returns for 1968, 1969 and 1970 because in auditing the returns for 1971, 1972 and 1973 he had found the following differences between the income reported by the appellant in his tax returns as coming from the Quebec health insurance board and the amounts actually received by the appellant from that source:

The appellant’s only objections with regard to these years concerned automobile expenses.

2.05 He had carried out a detailed investigation with regard to financial institutions and so on. In addition, he had established the cost of living at $10,500 in 1968, $11,000 in 1969 and $12,000 in 1970. According to him the Gallup poll had established $174 per week as the cost of living for two adults and two children at that time.

2.06 According to Mr Houle, the appellant maintained that he had a system of bookkeeping but he did not show it to him even after he was given five months’ time to do so. Another employee of the respondent apparently extended this time limit to fifteen months.

2.07 Another witness for the respondent, Mr Alfred Bell, met with the taxpayer three or four times in his capacity of appeals officer to discuss the appellant’s notice of objection. Mr Bell produced as exhibit I-4 a “statement of assets and liabilities as of December 31 of each of the years 1967,1968, 1969 and 1970’’, “a capital reconciliation statement’’ and “a capital cost allowance schedule (automobile)”. These statements were completed on April 10, 1978, that is after the date of the first notice of reassessment. All of these statements were in general supported by documentation.

2.08 The statement of assets and liabilities shows that between December 31, 1967 and December 31, 1970 the following increase took place:

2.09 The following is a summary of the figures shown in the capital reconciliation (exhibit I-4):

2.10 According to exhibit I-4, the cost of living was established as $5,500 in 1968, $6,000 in 1969 and $6,000 in 1970.

During these years the family was made up of five people: the appellant, his wife and three children aged five, seven and eight years in 1968. The cost of living figures used to support the first notice of reassessment, issued on October 4,1976, were $10,500 in 1968, $11,000 in 1969 and $12,000 in 1970. One factor on which the respondent based these figures was the result of a Gallup poll which established $174 per week as the cost of living for two adults and two children. The social life of an average physician was also taken into account. The cost of living figures were reduced to $5,500 (1968), $6,000 (1969) and $6,000 (1970) following the meetings between Mr Bell and the appellant.

On September 29, 1977, at a final meeting with the appellant, Mr Bell put forward the following figures with a view to arriving at a settlement: $3,500 in 1968, $3,500 in 1969 and $5,500 in 1970. The appellant refused to accept these figures.

2.11 Mr Gérard Tousignant, who also testified for the respondent, took over from Mr Bell in October 1977. He met with the appellant twice and their discussions were concerned primarily with the cost of living. Mr Tousignant did not feel himself bound by Mr Bell’s proposals. Finally, on March 30, 1978, he produced a memorandum recommending that the second notice of reassessment be issued based on Mr Bell’s figures as produced in exhibit I-4 (paragraph 2.10).

2.12 In his own testimony, the appellant stated the following facts.

(a) He was admitted to the college of physicians in 1958 and became a surgeon in 1962.

(b) From 1962 to May 1966 he practised his profession in Beauceville, Quebec.

(c) From June 1966 until the end of June 1967 he worked for the Quebec Cartier Mining Company in Gagnonville on the North Shore of the St Lawrence.

(d) From June 1967 to July 1968 he was a resident doctor in the emergency department of the Jean Talon hospital in Montreal.

(e) Beginning in July 1968, he studied obstetrics and gynecology full time at the Collège Royal in order to prepare for the November 1968 examinations, which he did not pass. During this period he had no office and no income. In his 1968 tax return he reported professional fees of $4,936.19 (exhibit 1-1).

(f) From November 1968 to July 1969 he looked for work. In September 1969 he joined the staff of the Fleury hospital as assistant surgeon. He remained in this position until January 1971 when his status was changed to that of surgeon.

(g) In his tax returns for 1969 and 1970 he reported professional fees of $1,700 and $4,084.50 (exhibits I-2 and I-3). He stated in his testimony that from June 1978 to September 1969 he had not “earned a red cent”.

(h) He stated that during the years from 1968 to 1970 he had lived mainly on money that he had earned earlier, from 1962 to 1968.

(i) He said that during the period in question he did not go out much. He did not take any trips, belong to any social clubs or take part in any sports (golf, fishing, hunting) other than walking.

(j) As far as h is books were concerned, he maintained that he had shown them.

(k) The appellant maintained that during the years in question he had reinvested the interest that he had earned on his investments.

2.13 Mr Tousignant was once again called to testify and he produced as exhibit 1-7 a memorandum concerning the source and application of funds as well as the cost of living:

Expenses related to the following items had not been considered in arriving at these figures for application of funds: (1) automobile expenses;

(2) food; (3) clothing; (4) gifts; (5) pocket money; (6) home maintenance and furnishings; (7) magazines, newspapers, books; (8) entertainment; (9) cleaners, barbers, hairdressers; (10) charities, associations; and so on; (11) medical and dental expenses.

2.14 After receiving the second notice of reassessment, issued on June 22, 1978, the appellant filed an appeal to the Board on September 18, 1978.

3. Act—Case Law—Comments

3.1 Act

The principal sections of the Income Tax Act involved in this case are subsections 152(4), 163(2) and 163(3) as well as subsection 62(3) of the Rules (ITAR). These sections read as follows:

152.(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

163.(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made, or has participated in, assented to or acquiesced in the making of, a statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

163.(3) Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

ITAR 62.(3) Subsection 163(1) of the amended Act is applicable in respect of any return of income required to be filed after 1971 and subsection 163(3) thereof is applicable in respect of any appeal instituted after the coming into force of this Act.

3.2 Case Law

The case law consulted by the Board was as follows:

1. Bernardin Baril v MNR, [1976] CTC 2383; 76 DTC 1276;

2. Vincenzo Curcio v MNR, [1978] CTC 2076; 78 DTC 1097;

3. MNR v Maurice Taylor, [1961] CTC 211; 61 DTC 1139;

4. D E Morgan et al v MNR, [1973] CTC 2192; 73 DTC 146.

3.3 Comments

3.3.1 The respondent’s evidence to the effect that in 1971,1972 and 1973 the appellant concealed $76,657.33 in income was undoubtedly a good reason for extending the investigation to cover the years 1968,1969 and 1970 but it does not in itself constitute evidence that any income was concealed during these three years. Furthermore, it is common knowledge that it was in 1971 that the government of the Province of Quebec began paying the cost of medical care.

3.3.2 With regard to the revised figures for total income (1968: $14,292.93; 1969: $12,401.82; 1970: $9,237.38) and the increase in total income (1968: $9,437.95; 1969: $9,347.46; 1970: $3,956.19) the weight of the evidence is in favour of the respondent (see paragraph 2.09). These conclusions (except, of course, for the cost of living) are based on supporting documents establishing assets and liabilities as of December 31, 1967 and December 31, 1970 and showing a gross difference between the two of $36,013.15 (see paragraph 2.08) with an increase in capital of $10,864.15 (see paragraph 2.08) divided as follows: $2,476.24 in 1968, $1,753.54 in 1969 and $6,634.37 in 1970 (see paragraph 2.09). This is without considering the cost of living and other expenses (see paragraph 2.10).

During this entire three-year period, however, the appellant reported having earned a gross income of only $13,190.53 ($4,854.98 in 1968; $3,054.36 in 1969 and $5,281.19 in 1970) (see paragraph 2.03).

The evidence of an increase in capital of $10,864.15 cannot be overcome merely by the appellant’s unsupported statements in his arguments before the Board. Perhaps he had other investments as of December 31, 1967, in addition to those established by the respondent? In any event, he did not show this to be the case. If he did have other investments in 1967, why did he not make them known? It would have been in his own interest to do so. It is therefore the opinion of the Board that the evidence regarding the increase in capital of $10,864.15 (see paragraph 2.08), without considering the cost of living and other expenses, must be accepted by the Board. Comparison of this amount with the reported income of $13,190.53 indicates that the appellant made a misrepresentation within the meaning of subsection 152(4) in reporting his income for the years in question.

3.3.3 The only point still at issue is the cost of living. The appellant presented no evidence regarding the other expenses such as insurance premiums, automobile expenses, housing, taxes paid and private schooling. Owing to the nature of these expenses, moreover, they were almost all supported by documentation.

Could the cost of living in this case, that is the cost of food, clothing, telephone, electricity, home maintenance, hair styling, gifts and newspapers for five people during the years 1968, 1969 and 1970 have been less than $5,500, $6,000 and $6,000?

Paragraph 2.10 shows how these figures were arrived at. It must be admitted here that the term “cost of living’’ also includes other expenses (housing, school fees, automobile expenses, taxes and so on) which were taken into account separately by the respondent. These other expenses alone totalled $9,098.93 in 1968, $6,707.82 in 1969 and $11,987.28 in 1970. The Board feels that in the present case the cost of the other items such as food, clothing and so on could reasonably be put down as $3,500 for 1968, $4,200 for 1969 and $5,000 for 1970.

3.3.4 Penalties

The penalties of 25% under subsection 163(2) are upheld owing to the omissions amounting to gross negligence in the appellant’s tax returns as filed.

4. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.