Dona Legros, Barbara M Legros v. Minister of National Revenue, [1981] CTC 2142, 81 DTC 99

D E Taylor:—These are appeals heard on common evidence in Toronto, Ontario, On December 9, 1980, against income tax assessments which provided the following information:

Dona Legros — dated November 20, 1979.

	Other Income
		Added		Total Tax	Penalty
1973		$5,091.74		$3,770.48		Nil
1974		3,000.04		4,010.83		Nil
1975		115.92		3,783.37		Nil
Barbara M. Legros — dated November 26, 1979
	Other		Interest	Total
	Income		Income	Additional
	Added		Added	Income	Total Tax	Penalty
1973	$2,741.70	$	949.88	$3,691.58	$1,951.75	$250.00
1974	1,615.41	1,625.13		3,240.54	2,211.69	235.82
1975	62.42	2,897.93		2,960.35	2,066.01	230.17
1976	Nil	5,658.61		5,658.61	5,198.37	429.41

A schedule of “Net Worth Discrepancy” provided with the reassessments reads:

Dona and Barbara Legros

Revised Schedule of Net Worth Discrepancy

For the Taxation Years 1973-1976

	Dec. 31/73	Dec. 31/74	Dec. 31/75	Dec. 31/76
Increase in Net Worth	$21,955.60	$21,955.60	$21,955.80	$21,955.80
Add:
Personal Expenditures
(Per Schedule)	11,815.88	14,356.69	15,328.64	16,696.97
Apparent Income	$33,771.68	$36,312.49	$37,284.44	$38,652.77

Deduct:
Reported Not Income	(18,150.25)		(20,417.55)	(26,047.32)		(29,785.35)
R.R.S.P. Contributions	( 2,629.00)		( 4,030.00)	( 4,088.00)		( 1,581.00)
Board Money	( 2,280.00)		( 2,200.00)	( 2,340.00)		( 2,880.00)
Income Tax Refunds	( 1,129.11)		( 1,824.36)	( 1,732.85)		(	966.37)
Total Discrepancy	$ 9,583.32		$ 7,840.58	$ 3,076.27		$ 3,440.05
Deduct:
Unreported Interest Income	(	949.88)	( 1,625.13)	( 2,897.93)		( 5,658.61)
Sale of Excess Furniture
(6/73-12/74)	(	800.00)	( 1,600.00)
Unexplained Discrepancy	$ 7,833.44		$ 4,615.45	$	178.34	$		Nil
To be allocated as follows:
Mrs Legros
Unreported Interest Income	$	949.83	$ 1,625.13	$ 2,897.93		$ 5,658.61
Unexplained Portion of
Discrepancy		2,741.70	1,615.41		62.42	$		Nil
Total	$ 3,691.58		$ 3,240.54	$ 2,960.35		$ 5,658.61
Mr Legros:
Unexplained Portion of
Discrepancy	$ 5,091.74		$ 3,000.04	$	115.92	$		Nil

*Unexplained portion of discrepancy allocated on an availability of funds basis.

W K Furtney

July 9, 1979.

WKF:dc

At the commencement of the hearing counsel for the appellants agreed that the amounts indicated on the above schedule for “Personal Expenditures” and for “Unreported Interest Income” should be accepted.

Contentions

For both appellants:

— The calculation of the net worth discrepancy has been based on faulty calculation by the Minister of National Revenue.

For Barbara Legros only:

— There should not be any penalty . . . upon the following grounds:

(a) the taxpayer contacted the Minister with respect to the aforesaid interest income, at which time it was indicated to the taxpayer not to include this interest income;

(b) under the circumstances, the omission of the said interest income does not amount to gross negligence in the circumstances and does not support an application of penalty as authorized by subsection 163(2) of the Income Tax Act and section 17 of The Income Tax Act (Ontario);

(c) The taxpayer relies on subsection 163(3) of the Income Tax Act and puts the Minister to the task of discharging the burden of establishing the facts justifying the assessment of the aforesaid penalty.

For the respondent:

— The appellants failed to report income, whether “other income” or “interest income” as assessed.

— Penalties as imposed are warranted.

Evidence

Mr Keith Furtney, an officer of Revenue Canada, reviewed the history of the audit of the appellants’ affairs and of the reassessments at issue. With regard to the penalties, Mr Furtney pointed out that (a) since some mortgage interest income had been reported in the year 1976 by Barbara Legros, and (b) since the period involved was a total of 4 years, it was decided by Revenue Canada that the penalties were warranted. No reasons were provided for imposing penalties (which only show up in the Barbara Legros assessments) with regard to the “net worth discrepancy” portion of the added income.

The appellants testified that on two separate occasions they had telephoned Revenue Canada and been assured that amounts received from mortgages need not be reported if the money was being reinvested. They did not provide names of the officials of Revenue Canada who gave such advice; neither was it clear from their testimony that the question asked by the appellants had distinguished between interest and principal payments received from mortgages. The apparent total “net worth discrepancy” for both appellants arose as a result of a $100,000 payment to them in 1976 by a Mr Robert Page, representing amounts apparently loaned by Barbara Legros to Mr Page over a long period of time, according to counsel for the appellants. No information regarding the “loans”, the “repayments” or anything else about this part of the appeals was provided to the Board, but it was agreed by counsel that indeed there had been some payment from Page in 1976. Counsel for the appellants submitted some calculations which he contended showed that a proper distribution of the apparent “net worth discrepancy” over the four years involved (as opposed to the Minister’s allocations), plus acceptance of the fact that there had been an overpayment from Page, effectively eliminated all the amounts as income to the appellants. The Minister did not accept the assertion that Mr Page had overpaid Mrs Legros, nor did the Minister attach any importance to the revised allocation statistics presented by counsel for the appellants.

Argument

Little in the way of direct or specific argument was given by counsel, other than a repetition by them of the contentions noted earlier.

Findings

The case made by the Minister regarding the penalty imposition is only a very modest reflection of the responsibility imposed under subsection 163(3) of the Act. Merely informing the Board that the Minister was of the opinion that the omission of the amounts in question was a matter of gross negligence, without proper identification and definition, his hardly satisfactory in a matter of this kind. While the circumstances and views noted in Isadore Waxstein v MNR, [1980] CTC 2398; 80 DTC 1348, may not be totally applicable in the instant appeals, the Minister’s efforts in this matter must be judged against the standards of “justification” exhibited in the array of pre- vious cases dealing with subsections 163(2) and (3) of the Act. It is clear from the evidence that Barbara Legros was aware that she had received “interest income”, and that she “knowingly” left it out of her tax returns. Such omission was not the result of simple negligence or carelessness, and the telephone calls allegedly made to Revenue Canada do not alter that fact. In Jet Metal Products Limited v MNR, [1979] CTC 2738; 79 DTC 624, at 2756 and 637 respectively, the Board outlined the following general scale of offences in order of their relative seriousness.

(a) Misrepresentation

Carelessness 152(4)

Negligence 152(4)

Gross negligence 163(2)

Wilful Default 152(2)

Knowingly 163(2)

(b) Fraud .....................: 152(4)

It is the conclusion of the Board that the penalties imposed were warranted with regard to the interest omitted from the reported income of Barbara Legros. The Board has no information or data upon which to quantify this part of the total penalty portion of the assessments, and that aspect of it is left to the Minister in reassessing the appellant’s income. With regard to the portion of the penalties assessed against Barbara Legros which related to the “net worth discrepancy” income, the Minister has not discharged the burden of “establishing . . . the facts justifying the assessment of the penalty”. It is even more puzzling to note that for exactly the same income source (whatever it was), penalties were assessed against Barbara Legros but not against Dona Legros. The part of the penalty assessed against Barbara Legros which is related to the “net worth discrepancy” income added is to be reversed in the reassessments.

Turning to that particular item in dispute — the “net worth discrepancy” itself, the appellants in their minimal evidence have failed to provide any rationale which would either eliminate, or account for the alleged amounts, as anything other than taxable income as assessed. To this extent, the appellants have failed to discharge the obligation upon them in the appeals to overturn the basis of the Minister’s assessments for tax, even though the basis upon which the Minister did assess is less than completely clear to the Board. Counsel for the appellants attempted to discharge the onus by simply restating, reshaping or restructuring the known facts and certain assumptions around a different hypothesis than that used by the Minister. That is not an adequate process for the conduct of an income tax appeal.

Decision

The appeals of Barbara M Legros for the 1973 to 1976 taxation years inclusive are allowed in part and the matter referred back to the Minister for reconsideration and reassessment in order that any portion of the penalties imposed which relate to the “net worth discrepancy” income shall be reversed. In all other respects her appeals are dismissed.

The appeals of Dona Legros for the 1973 to 1975 taxation years inclusive are dismissed.

Appeal of B M Legros allowed in part.

Appeal of D Legros dismissed.