Peter Rawsthorne v. Minister of National Revenue, [1981] CTC 2187, 81 DTC 116

D E Taylor:—This is an appeal heard in Toronto, Ontario, on July 30, 1980, against an income tax assessment for the year 1976 in which the Minister of National Revenue added an amount of $9,162.14 to the income reported by the appellant from his business operations, and also imposed penalties under the Income Tax Act. During the year in question, the appellant operated a business under the name “Niagara Fence Company”, in the City of St. Catharines, Ontario. In assessing the appellant, the respondent relied, inter alia, upon sections 3, 4, 9, subsections 11(1), 152(7) and 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Contentions

For the appellant:

Mr Rawsthorne entered Canada on April 1, 1974 with English pounds and Canadian dollars having a total Canadian value of $33,000 to $34,000. He was met at the airport by Mr & Mrs Ron Jones now of 9 Marmora St, St Catharines, Ont. He lived at their home in Bramalea for approximately 3 to 4 weeks. As Mr Jones was apprehensive about all the money being in his house, he took Mr Rawsthorne to the Toronto Dominion Bank, Bramalea City Center, Brampton, Ont and all the money was deposited in a safety deposit box. The receipt from the bank has been thrown out. A couple of weeks later, Mr Jones took Mr Rawsthorne to the Toronto Dominion Bank, Westwood Mall, Toronto where he exchanged approximately 8,000 pounds into Canadian funds. The amount is reflected in the deposit from the Westwood Mall Branch to the Queenston St Branch, St Catharines, Ont on August 26, 1974. Upon moving to St Catharines, Mr Rawsthorne kept the balance of the funds at home and when necessary used the cash on hand to purchase various assets.

Our appeal is based upon the eye-witnesses who will verify the amount of cash brought into Canada which was subsequently used to purchase the assets the Department has included in its net worth assessment. There was cash on hand at the beginning of the 1976 taxation year.

An affidavit as to the amounts and events, if necessary, can be supplied by Mr & Mrs Jones.

For the respondent:

— the appellant at all material times, failed to keep proper books, records and accounts, and as a result, the respondent calculated the appellant’s income on a net worth basis;

— in his 1976 taxation year, the appellant failed to report income in the amount of $9.162.14 which amount is calculated in this way.

SCHEDULE I
Net worth per taxpayer representative	$34,127.73
End of 1975 fiscal
Deduct: Unsubstantiated COH	10,734.73
Revised net worth 31/3/75	$23,393.00

Net worth per taxpayer representative		$32,479.97
End of 1976 fiscal
Less 1975 net worth		23,393.00
Increase in net worth		9,086.97
Add personal expenditures		7,851.68
		$16,938.65
Deduct: Reported business income	$6,592.03
(Net of CCA)
Investment income	124.64
Family allowance receipts	1,059.84	7,776.51
Apparent increase in income 1976		$ 9,162.14

The question of the onus for proof, as described in subsection 163(3) of the Act and touched on in Isadore Waxstein v MNR, [1980] CTC 2398; 80 DTC 1348, was raised by both parties at the hearing. In the instant case, the presiding member stated that he was very conscious of the concern for protection of the appellant against unwarranted cross-examination expressed in Waxstein (supra) and if both counsel were in agreement, he would proceed in the order indicated in that decision. Counsel for the Minister was not in accord with that procedure and pointed out that in her opinion the initial responsibility for overturning the assessment of tax still remained with the appellant. Counsel for the appellant agreed to proceed.

It is my opinion that in the current uncertain stage of interpretation to be placed upon subsection 163(3) of the Income Tax Act, counsel for the Minister has two choices at the level of an appeal hearing before the Tax Review Board — first to proceed with all the onus, as detailed in Waxstein (supra) and more recently in Wellington Taylor v MNR, [1980] CTC 3003, 81 DTC 3,

— or to anticipate certain restraints on his right of cross-examination to be imposed by the presiding member if necessary. Subsection 9(2) of the Tax Review Board Act may serve to ensure that the appellant is not placed in additional jeopardy even though that imposes a very heavy responsibility upon the presiding member in conducting an appeal. The burden of the appellant, in an income tax appeal, to overturn the basis of the Minister’s assessment of tax, rather than to have the Minister substantiate that assessment, is onerous in itself. The prospect of self-incrimination under cross- examination, in a penalty assessment, should not be added to that burden without serious consideration. In the instant matter, counsel for the respondent restricted the cross-examination very appropriately, and there was no requirement of the presiding member to intervene.

Evidence

The following “Statement of Net Worth’, prepared by the appellant’s accountants of St Catharines, Ont, was provided to the Board:

STATEMENT OF NET WORTH

The critical amount which was not accepted by the Minister on the above statement is the “Cash on Hand” of $10,734.73 at March 31/75.

A copy of the appellant’s “Canadian Immigration Identification Record” (Exhibit A-1) showing that he landed in Caanda on April 1, 1974 was filed, which also included the information that on filing of the application in England, the “Amount of money to be transferred to Canada” was first shown as being $25,000 but this amount had been altered to something representing either $14,000 or $17,000, it being difficult to distinguish which one. The same form showed that he had $4,720 in his possession on landing here on April 1, 1974.

The appellant introduced as Exhibit A-6, a copy of a bank record showing a transfer of funds in the amount of $16,278.53, on June 3, 1974 from The Toronto-Dominion Bank in Mississauga, Ontario, to The Toronto-Dominion Bank in St Catharines, Ontario. An affidavit from the appellant dated May 3, 1978 with regard to this appeal, sworn before his own solicitor, was presented by the respondent and admitted by the appellant, and contained the following paragraphs:

3. At the time of my immigration approximately $17,000 was transferred from England to a bank account in Canada on my behalf.

4. In addition to the $17,000 aforementioned, I brought with me on my own person approximately 8,000 pounds sterling which was the equivalent of approximately $16,000. This was in addition to the $17,000 previously transferred.

The appellant testified regarding the accumulation of the alleged funds while he was still in England, to show that mathematically some amount in excess of $30,000 could have been available to his wife and himself from the liquidation of asets. But that is not the crux of the issue here. Considerable effort was also expended to demonstrate that the appellant must have had funds of that order (more than $30,000) available to him in Canada since his life style, asset acquisitions, bank deposits, business requirements, etc, required an expenditure of that magnitude. Again that is not the crux of the issue. The real issue is simply whether the evidence supports a conclusion that he did bring with him funds to the extent of $33,000 or $34,000 as he claims.

In relation to that prime point, the statement of the appellant in his notice of appeal was quoted earlier, and there is also an earlier statement in the notice of objection dated December 20, 1978 which reads:

. . . Mr & Mrs Jones who will verify the fact Mr Rawsthorne did bring $33,000 to $34,000 upon entry into Canada.

The testimony of the appellant under questioning by his counsel at the hearing on that point is:

Q. I understand that you emigrated to Canada on or about April 1st of 1974, is that correct?

A. Yes.

Q. Could you tell me essentially, just in your own words, what your position was when you left England financially?

A. Very good.

Q. Could you just elaborate on that a little bit?

A. Yes. With the sale of my home and the bank account I had, in cash I had somewhere in the region of $34,000.

Q. That is in Canadian currency?

A. Yes.

Q. I understand your wife came to Canada approximately three or four weeks after you arrived in Canada?

A. Correct.

Q. She joined you where?

A. I went back and brought her and the four children, and we arrived at Toronto Airport and we stayed with friends in Bramalea.

Q. When you attended with the Department of Immigration and these forms were completed and signed, there is a change on the form itself, and it indicates here, amount of money to be transferred to Canada. Can you explain that to me, please, and to the Chairman today?

A. When we were asked originally, we told them there was $25,000. That is what we were going to take out and the official informed me that there was a restriction of 5,000 sterling per family unit, plus 300 per person, and that is all you could take out, and I was very shocked and surprised.

It seemed that if you took more than that, you had to pay, if you took it out under four years, you had to pay a quarter of what you were taking out, and I was very surprised about that.

Q. Now —

A. So the official changed it to $14,000 to bring it within the limit and he reinitialled it there.

Q. You say he changed it?

A. Yes, he was the one who enlightened me and he was the one who changed it.

Q. Did he instruct you about it further? What did he say about making this change?

A. He enlightened me that there was no restriction in Canada, you know, so don’t worry about that end, so to speak.

Q. Did he advise whether you could take more moneys out of the country? What did he say?

A. No, he said, you know, about the restrictions at that end. He said, but there are no restrictions on any amount you bring into Canada.

Q. Do you recall whether that was changed before or after you signed this document?

A. After.

Q. It was changed after you signed it?

A. Yes, because he re-initialled it that he changed it.

Q. You say the initial next to the change was his initial or your initial?

A. His initial. This has been verified.

Q. Do I then understand your evidence that this was initially completed showing $25,000?

A. Correct. Then it was changed to $14,000.

Q. It was changed to $14,000?

A. Yes.

Q. Now, Mr Rawsthorne, do I understand correctly, in fact you brought more funds into Canada other than the $14,000 as indicated in this Immigration record?

A. Yes, I did.

Q. Was that discussed at all with the Immigration officer who instructed you on this form and made these changes?

A. Yes. Well, I was concerned about it and the official said, well, there is no restriction at that end.

Q. Essentially what was he saying to you in terms of taking money into Canada?

A. Don’t worry about it at that end because there is no restriction there.

Q. What about worrying about it at the other end, worrying about it in England, in Manchester, England? Did he take any position?

A. No.

Q. Did he give you any instructions?

A. No.

Q. Did he advise you what to do?

A. No.

Q. Had you indicated to him what you did intend to bring into Canada?

A. Say that again please.

Q. Had you actually indicated to the Immigration Officer what you intended to bring into Canada?

A. Yes.

Q. Now that would have been an Immigration Officer with the Canadian Immigration department?

A. Yes.

Q. Now I am looking at a photocopy of the document but I will refer back to Exhibit A-1. This document also shows a figure down here, Money in Possession, $4,720. What did that figure represent?

A. That was the sale of the contents of my home.

Q. That was representative of the sale of your furnishings and personal belongings, whatever that you were not bringing with you?

A. Right.

Q. Had you, in fact, sold those personal belongings at that time?

A. When I was going through the Immigration, no.

Q. Would that have been an estimated figure?

A. Yes.

Q. Are you able to then testify that, to the best of your knowledge and belief, approximately $4,720 using the Canadian figure represented sale of all your contents, is that correct?

A. Yes, household contents, everything.

Q. Now I understand that your wife emigrated to Canada approximately three or four weeks after you had actually arrived and had obtained landed immigrant status in Canada?

A. Yes.

Q. Your earlier testimony was you had gone back to England to bring her back?

A. Correct.

Q. Do you recall personally whether she brought any funds with her when she came to Canada?

A. Yes, she brought 2500 pounds which she received off her mother as a going- away present or whatever. She was an only child and that is what her mother gave her.

Q. You have indicated that you had, or at least you brought a fair amount of money with you?

A. Yes.

Q. Where was this money?

A. In a container, a metal container with our luggage.

Q. But when you came across on the airplane, did you come across in an an airplane?

A. Yes.

Q. When you came across in the airplane?

A. That was in my hand luggage.

Q. Was that with you personally on the plane or was it in luggage storage?

A. It was with me.

Q. You carried these moneys with you?

A. Yes.

Q. And when you went to Mr and Mrs Jones’ home, how long did you stay there?

A. Approximately three or four weeks.

Q. During the course of the three or four weeks, before your wife came to Canada, what took place with respect to these moneys you had brought with you?

A. Say that again, please.

Q. Before your wife came to Canada, there was about a three to four week gap there.

A. Right.

Q. As I understand your evidence, you were living with Mr and Mrs Jones?

A. Yes.

Q. What had you done with the moneys?

A. It was in Mr and Mrs Jones’ care.

Q. In their care?

A. They were minding it for me.

Q. What do you mean it was in their care? Had they taken it to a bank?

A. No, no, it was in their house and he was quite worried about it.

Q. Whereabouts would you have kept in the house?

A. In my bedroom in a drawer.

Q. Was it loose?

A. No, it was in this OXO box.

Q. This metal box you talked about?

A. Yes.

And under cross-examination by counsel for the respondent:

Q. Mr Rawsthorne, I am referring to Exhibit A-1, which is the Immigration record, which was put into evidence by your counsel, and I believe you testified that this was completed in England before you arrived, or at least partially completed. To where was it completed before you came here to Canada?

A. Looking back, from what I can remember, I thought the lot was completed. Q. Do you know when the $4,720 was written in?

A. No.

Q. You don’t know?

A. I thought it was part of the document.

Q. Yes, but do you know when it was put on the document?

A. When, what is the date on there? is there a date on that?

Q. I was asking you the question, Mr Rawsthorne, whether you knew when the $4,720 amount was placed on this form?

A. No, I do not. So far as I recollect, that was done when I went down to Immigration and I went down again after, I went down twice.

Q. In Britain?

A. Yes.

Q. Now getting back to this $4,700, I put it to you, Mr Rawsthorne, that that amount was, in fact, put on this form on your arrival at Canadian Customs here in Canada, is that not correct? When you arrived there and you declared yourself to be an immigrant, they asked you how much money you had on you and you told them —

A. That’s six years ago and I couldn’t honestly answer positive.

The relevant testimony of Mr Ronald Francis Jones, under questioning by counsel for the appellant was:

Q. In or about 1974, and you have heard the evidence that Mr Rawsthorne immigrated to Canada about April of that year and came and stayed at your home in Bramalea, is that correct?

A. Correct.

Q. Did you have occasion while he was staying with you to observe or see these funds that he has made reference to?

A. I did.

Q. Did you ever have occasion to handle any of these funds yourself?

A. Yes, it was exciting, I had never seen that much money in my life.

Q. Would you, in your own words, tell the Chairman of the Board exactly what you did see and what you did?

A. When Peter came, he told me how much money he had got. We all had a box in England to keep our money in a box, it sounds stupid, but we did, and he said he had got this money so I said, let’s have a look at it, you know, I had never seen that much money honestly.

So we got it out on the kitchen table with the wife and we worked it out at $2.31, and I thought wow, you know, it was an awful lot of money.

Q. Did you personally have occasion to count it?

A. Yes, we tried to work it out how much it would be at $2.30, and then I said to Peter, I’m scared with this money in my house. I said we’ll put it in a bank somewhere.

Q. Was it all pounds sterling, Mr Jones?

A. Approximately 10,000 pounds and then the rest of it was in Canadian money.

Q. Is there anything further you recall about these circumstances? Did you have any other occasion to handle these funds or see them?

A. No, once was enough for me. I just took one look at that and I wanted it in the bank.

Q. There was some evidence that the funds were taken to a bank, do you recall that?

A. Yes, I took Peter down to the bank in Bramalea and he put them in a safety deposit box right there.

Q. Now shortly thereafter, Mr Rawsthorne’s wife came to Canada, do you recall that?

A. Yes.

Q. Did she also come and stay at your home for a short period of time?

A. Just for two days.

Q. Do you recall seeing any funds that she had with her?

A. No.

And under cross-examination:

Q. When did you insist that Mr Rawsthorne take this money to a safety deposit box?

A. The day he showed it to me.

Q. When was that?

A. I really couldn't tell you.

Q. Was it after his wife had already arrived?

A. No, that was before.

Q. Was it long after he had arrived?

A. No, a couple of days.

Q. You said he had some Canadian?

A. Yes.

Q. How much?

A. I don’t know. I know we worked it out to around 33,000 bucks, and I haven't got that great a memory, but I can tell the truth.

Mrs Evelyn Jones testified under questioning by counsel for the appellant:

Q. You are married to Ronald Jones, is that correct?

A. Correct.

Q. Who previously gave evidence today?

A. Correct.

Q. You were present in the courtroom when Mr Rawsthorne gave evidence?

A. Yes.

Q. Would you tell the court and the chairman exactly what you recall of the circumstances during that period of time when Mr Rawsthorne was living at your home in Bramalea?

A. He came to Canada, I guess it was April 1, 1974, and he stayed with us approximately three weeks and went back to get his wife, and in the space of time when he went away back to England to get his wife, it was like five days.

Now in that five days he left the parcel of money he brought with him with us and when he came back, he had his wife with him. Then we had already rented him a townhouse and he was going to be moving to the townhouse like two days after, so he was with us, the whole family was with us for like two days.

Q. When he went back to England, where did you keep this money?

A. It was in my daughter’s dresser in the bedroom.

Q. Had you seen the money prior to that time?

A. No, I saw it then. No, I knew it was money because he asked me to keep it for him, and I said fine, I’ll just put in the drawer there.

Q. When did you first have occasion to see this money?

A. After he left. I just had a look but I didn’t actually — I handled it but I didn’t count it.

Q. Was there a point in time when, in fact, you counted it.

A. Yes, we did.

Q. When was that?

A. The actual night he got back to Canada with his wife.

Q. So this was when he got back with his wife and this was in your home?

A. Yes.

In response to cross-examination by counsel for the respondent, Mrs Jones testified:

Q. You did this, you say, the weekend after Mrs Rawsthorne arrived, the accounting?

A. She arrived, it was approximately on the weekend and I am not sure if it was a Friday night or a Saturday, but I know it was the weekend she arrived.

The Chairman then questioned this witness.

Q. Mrs Jones, this is the first time we have heard sitting around the counting table that there were four of you?

A. There wasn't four of us, there were three of us.

Q. Mrs Rawsthorne wasn't there?

A. She was asleep. She had just arrived from England and she was in bed asleep.

Q. But this was after Mrs Rawsthorne’s arrival in Canada?

A. Definitely.

Q. Did Mrs Rawsthorne contribute anything to the funds?

A. I didn't see anything like being contributed type of thing.

Q. You just sort of dumped the box out and started counting?

A. Yes.

Q. Then, as you say, this was some three or four weeks after Mr Rawsthorne’s arrival in Canada?

A. Right.

Q. I had an impression from earlier testimony that this counting procedure had gone on only a matter of a few days after Mr Rawsthorne’s arrival?

A. Actually he was with us for — like came on April 1st and he was with us approximately 21 days on a charter flight was what he was on because he was going back to bring his wife out.

Now while he was there, we knew he had quite a sum of money with him but we never really got to the point of saying how much have you got, that type of thing, but it definitely was counted. Like he went home, I think it was a space of five days. It’s kind of hard to recollect years ago, but there was a space of five days and then he came back.

Q. But this was not a matter of two or three days after his arrival. This was some two or three weeks, after Mrs Rawsthorne’s arrival?

A. Yes.

Q. As I say, it may have been faulty in my memory but it’s a bit unusual for that to happen, but I got the pretty clear impression from Mr Jones and Mr Rawsthorne that this counting procedure had been conducted within two or three days.

A. No, it definitely was not, not to my recollection anyway. It definitely wasn't in that space of time.

Upon recall to the witness stand by the chairman, the appellant responded as follows:

THE CHAIRMAN: Now I would like to direct your attention to the $4,720 down below.

Now (your) evidence was that that $4,720 represented the proceeds from the furniture and fixtures of your house?

A. Yes, Sir.

Q. I would like to suggest to you, Mr Rawsthorne, that I have great difficulty finding any relationship between that figure and anything to do with your furniture and fixtures.

A. Sir, I had more, sir, but with what had gone on in England —

Q. You had more what?

A. I was carrying more money.

Q. More money than what?

A. Than what was stated on here, because what happened in England, I just — I didn't know what I had.

Q. Now Mr Burroughs said to you, as I follow, if you put $25,000, you are going to have trouble with the limits, so we’ll make that $14,000 and you won’t have trouble with the limits?

A. Right.

Q. Having done that, he also said you won’t have any trouble when you get to Canada?

A. Yes, Sir.

Q. No matter how much you have, so when you get to Canada, I suggest to you that that $4,720 is precisely what it says it is, it is the dollars you had on you when you arrived in Canada, at least the dollars you reported?

A. Yes, Sir.

Q. And what you are saying now is that the dollars that you should have or could have reported was closer to $33,000 or $34,000?

A. I had done it on two trips, sir. I went back for my wife the second time, and the other money and what I had left was what totalled.

Q. Oh. Now all the money did not come over the first time you came over all by yourself on Laker aircraft. What did you bring with you the first time?

A. I left a lot of money with the wife just in case anything happened . . . I know I brought more than the $4,700 . . .

THE CHAIRMAN: Obviously, I didn’t realize you were doing it in two trips.

So that particular document then would show that you brought in $4,720 and what you are saying is that you brought in something considerably in excess of $4,720?

A. Yes, sir.

Q. What does the $4,720 mean?

A. That is what I had more or less on me when he asked me, you know, what I had.

I was confused with Immigration, you know, going through.

Q. I don’t think so.

Now first of all you tell the visa officer you are going to bring $25,000?

A. Yes, sir.

Q. He said that is going to get you problems, changed it to $14,000. and Ms Boris asked you on what basis and so on and there was not a very satisfactory response to that.

Now that amount is still on the visa report, the pink slip when you arrive in Canada. You have turned that in and I presume the Customs officer said to you, how much money have you got and someplace he got the figure of $4,720.

A. I don’t know, sir.

Q. Presumably you must have told him $4,720. Did anybody else tell him that?

A. No, sir.

In connection with the imposition of a penalty, Mr Raymond Alphonso Di Martile, Field Auditor for Revenue Canada, presented his “Penalty Recommendation Report’’ as Exhibit R-1. The calculation and assessment of tax had been done on a “net worth basis’’ due to the inadequacy of the appellant’s business records. Little had been provided by the appellant during Mr Di Martile’s audit which would validate the existence of the amount in ques tion ($9,162.14.) as at March 31, 1975, which was the start of the appellant’s business year under review. Certain specific amounts of unreported income were uncovered by Mr Di Martile as a result of “third party investigation’, and in his words:

Due to the fact that we did not acknowledge that the $10,000 was on hand at the beginning of the period, and since we could not account for any other source of funds, we considered them to the unreported business income.

The critical portion of Exhibit R-1 “Penalty Recommendation Report” reads as follows:

Evidence of Knowingly or Gross Negligence

At the outset of his self employment as a fence installer, Mr Rawsthorne made several accounting errors in his record keeping which may be summarized as follows:

Revenue items overlooked (8 in number)	$1,771.05
Less revenue counted twice from daily and weekly summaries	527.50
Revenue acknowledged by taxpayer as omitted	$1,243.55

The above amount was earned while subcontracting for Wright Recreation Limited.

In addition to income earned while subcontracting for Wright Recreation Ltd, a third party check of Lincoln Feed Limited, St Catharines, a supplier of fence materials, showed purchases for which there were no reported corresponding sales:

Date	Amount	Delivered to
1) Nov 7, 1975	$373.72	Dr Stone, 364 Martindale Rd
2) Sept 5, 1975	361.57	5 Bayridge, St Catharines

The first purchase (above) as for installation of a swimming pool fence for which the doctor paid $766. The second purchase was said by the taxpayer to have been made as “a favour to a friend”. This purchase may be reasonably expected to have yielded revenue equal to the purchase price of $361.57.

Argument

The significant points noted by counsel for the appellant were:

He has got money on him. He has money personally on him and he knows that those moneys which he has personally on him, he has to some degree illegally taken from the country, taken from his native country.

When he goes through the Immigration department here in Canada, at least Customs, whatever that would be, at the Toronto Airport, he has to have that nervous apprehension. He has got to be concerned about the moneys he is bringing, and I am going to suggest — and again I respectfully suggest that at that time he said what he thought he should say to the department official. In other words, that he had $4,720 on him and he said that because he had apprehensions, he had apprehensions about saying, well, I’ve got $22,000, $25,000 or $27,000 converted on me and I think he had those apprehensions that if he said those things, that between the Canadian Immigration department and the English Immigration department, he perhaps would be denied access to Canada.

Here is a situation where a person has sold his home, he has sold his assets, he has nothing to return home to in terms of a dwelling or anything elese. That real estate transaction was closed and completed and it is indicative of moneys which, in fact, he brought with him.

We then have the testimony of Mr and Mrs Jones and again, even as husband and wife, they are not 100 per cent certain of the time factor, and I respectfully submit that that is very normal. Going back six years is very difficult to try to put time factors together, but we do have their testimony that they actually remember dealing with the money and counting it and converting the money.

That is direct evidence of what has been submitted today and they deal with it in the sense that they had never seen that kind of money before. It was almost like monopoly money to them because the amounts were that high, but they do testify, Mr Jones, his statement is that he counted it, he helped convert while they were in the kitchen what the approximate worth of those funds were.

Now Mrs Jones said that took place after Mrs Rawsthorne had come to Canada. From Mr Jones’ testimony, Mr Chairman, he readily admits on the stand that he doesn’t quite recall exactly when it was or what the situation might have been, and he honestly, through his testimony, said from time to time, I am not certain.

He said in a sense, if I answer that, I would be telling a lie because I am not certain, I just don’t know when things were taking place, I really don’t recall. . . .

. . . there is no reason to dispute the testimony of Mr and Mrs Jones. There is no reason to dispute what Mr Rawsthorne says, he did bring excess moneys to Canada over and above those funds which were used as the deposit to buy his home.

The specific comments of counsel for the respondent were:

. . . I agree with one thing my friend has submitted to you and that is there had to be other income.

The Minister has assumed that that other income was taxable income to the appellant. The amount was determined, as you heard in the evidence, pursuant to a net worth assessment. We heard no evidence today, with respect, Mr Chairman, that there was no reason to do that (by) net worth assessment.

No definite evidence has been presented here today with respect to whether there was or was not a sterling embargo and whether, if it indeed existed, whether it was as related to you today by Mr Rawsthorne.

He did say, however, as he understood it, he could get the money out four years later, so basically the question is, in order to get it out now and to get it out fully, he was willing to attest to a false declaration, and now we are to believe him that he, in fact, had some $33,000, the equivalent thereof, when he entered this country.

But he also said that this official of the Canadian Government, performing his official duties overseas told him he had no problem once he got to Canada and he also said that when he left England, he did not show them the Immigration form that he had completed for the Canadian Government, he just showed them the passport.

So when he got to Canada, and my friend has asked that we say that we assume that he is very nervous, all these changes are going on, but he arrived on the doorsteps of a new country as a landed immigrant with his forms and he let it stand there, knowing that there were no consequences to him on entry to Canada, knowing it hadn’t anything to do with the British Government, but he came up with a figure, I could not understand the appellant’s evidence, Mr Chairman, with respect, as to how that $4,000 and some odd was arrived at. I really don’t understand, it kept on changing around.

At first, it was my understanding, as you expressed also, Mr Chairman, quite clearly on the appellant’s evidence that he came and he brought it all with him except for the 2,500 pounds that his wife had. That he came and he went to the Jones’ and that a few days later, according to the evidence of himself and Mr Jones, they counted it all out on the table and it came to $34,000 by the time you added up the Canadian currency and the pounds and exchange at $2.31, and they put it all in a safety deposit box except for maybe some Canadian dollars, but we didn't know how much of that was kept out.

Now Mrs Jones then gets up on the stand and she says, Oh no, no, no, he only had, he had some of it in his bag and he left the bag with me and he went back there, and Mrs Rawsthorne was, in fact, there, and it was later, it was after Mrs Rawsthorne had come.

Now there is no question Mrs Rawsthorne did not arrive until April 28, and there is no question that Mr Rawsthorne arrived April 21st. Now until this point, two people have testified that it was a couple of days after his arrival, and now Mrs Jones is saying that Mrs Rawsthorne was, in fact, there.

. . . you have heard no evidence today for any reasonable basis to cast doubt on that assessment.

There is still the question of penalties . . .

The Minister’s representative has testified that they found a discrepancy they could not acocunt for. The taxpayer gave . . . no documentation to account for it.

From thereon, until we come here today, we have different things coming up and changes in the story all the way along.

. . . it is submitted that it is incumbent upon the appellant to satisfy the Minister what the source of these funds is. They are not (supported), the only inference possibly to be made is that he has deliberately omitted income. . . .

Findings

As I see it, in an appeal against a net worth assessment, the appellant must establish either (a) the amount at issue upon which he has been taxed was only a calculated illusion, and therefore did not exist for purposes of the imposition of tax; or (b) that although the amount in question was real, it was not income subject to tax. In certain situations when penalty has been assessed (particularly net worth assessments), for reasons of expediency the Minister might offer to lead evidence first. I am not persuaded, however, that such a procedure relieves the taxpayer from the onus on every taxpayer to dislodge the assessment of tax on the income, or that it places the “burden of proof” on the Minister for the assessment of tax — see Johnston v MNR, [1948] CTC 195; 3 DTC 1182, at 202 and 1183 respectively:

Notwithstanding that it is spoken of in section 63(2) as an action ready for trial or hearing, the proceeding is an appeal from the taxation and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested. (Underlining mine)

It would be my view, at the present time, that allegations or assumptions, as well as facts, when put forward by the Minister in the assessment or in the reply to notice of appeal in relation to the assessment of tax itself, invite and require just such an effort at demolition on the part of the taxpayer, as is described in Johnston (supra).

The Board is always conscious of the delicacy and sensitivity of situations wherein the sworn testimony of a taxpayer may be the major, perhaps the sole, evidence made available. It is vital that the critical assertions made under such circumstances be placed in perspective against a background that can test them, if that is at all possible. In the instant case, all three witnesses for the appellant — the appellant himself, Mr Jones and Mrs Jones — remained in the court room during the hearing and therefore heard all the testimony. Even under this set of circumstances permitted at the hearing by the Minister, their accounts were not consistent on critical points regarding the funds allegedly brought into Canada. The notice of objection, the notice of appeal, and the first part of the appellant’s testimony quoted earlier can be interpreted only one way in my opinion — the appellant therein claimed that he had brought the disputed amount (about $34,000) into the country on April 1, 1974. The appellant’s later testimony and Exhibit A—1 are both in direct conflict with that assertion. His testimony now is that it was brought into the country in two trips: Exhibit A-1 indicates only $4,720 was brought in on April 1, 1974. There is no similar Canadian immigration identification record for Mrs Rawsthorne or any of the children which would support a conclusion that any substantial funds were brought in by any of them on the “second trip”.

The separate testimony of the two witnesses, Mr and Mrs Jones, is also in direct contrast both with each other, and with the appellant on important points — time, place and date. There is no clear evidence to support the assertion that anyone actually counted the money in an organized or systematic manner. The pretention that this appellant on leaving England left his financial affairs in such disarray that the money was literally dumped out on a table and counted in order that he would know how much he had, is difficult to accept. The only physical evidence of any money on deposit in any bank in Canada during the critical time was the bank transfer of $16,278.53 (Exhibit A-6).

This would agree rather neatly with the $17,000 allegedly shown on Exhibit A-1, and would also agree with the statement in Exhibit R-3 that he had transferred to a bank in Canada about $17,000. The appellant’s explanation that by “transfer” he meant bringing it with him on his own person is hardly convincing. The original amount on Exhibit A-1 ($25,000 as an estimate) is very close to the total of $16,278.53 (Exhibit A-6), $4,720 (Exhibit A-1) and £2,500 (about $5,700) allegedly brought over by the the appellant’s wife, and there is nothing physical from the appellant to support any greater amount. The appellant’s only explanation for the total of the excess funds at issue (that they were brought from England) has not been supported.

As opposed to the above unconvincing testimony and evidence on behalf of the appellant, the Minister has demonstrated that at least certain items of business income were left out of the accounting records and that no satisfactory explanation was provided even for these particular occurrences. The Minister therefore is entitled to consider that the entire amount at issue ($9,162.14) was business income and, accordingly, subject to the tax assessed. However, while this amount of business income was left out of reported taxable income, that is not necessarily or automatically an offence under subsection 163(2) of the Income Tax Act, thereby subjecting the tax assessed to additional penalty imposition. In my view, this is a rather crucial point — the tax is assessed on the income but the penalty is levied on the tax assessed.

In the instant case, the income tax, and the penalty, rested on three points indicated by the Minister:

“The statement of net worth submitted by your accountant is being accepted with the deletion of the $10,734.73 reported as cash on hand as at March 31,

1975. This amount has not been substantiated.” (from notice of re-assessment) (2) “the appellant, at all material times, failed to keep proper books, records and accounts, and as a result, the respondent calculated the appellant’s income on a net worth basis;” (reply to notice of appeal)

(3) “in his 1976 taxation year, the appellant failed to report income in the amount of $9,162.14, which amount is calculated per Schedule I hereto*. (Reply to notice of appeal).

*Reproduced under “Contentions”.

A significant comment in Wax stein (supra) from pages 2401 and 1351 respectively touches precisely on that point and is critical to the view I hold on subsection 163(3) of the Act:

I am of the opinion that the respondent must do something now which he did not have to do prior to tax reform.

When the Minister is not content to merely tax the income but demands penalty on the tax, he (the Minister) must establish why it was left out of income. As I see it, the amount in question in this appeal could be left out of income in one of three ways:

(a) “neglect”;

(b) “knowingly”; or

(c) “under circumstances amounting to gross negligence”.

The Minister must demonstate that the terms “knowingly” or “gross negligence” are applicable, or at least determine to the Board’s satisfaction that simple “neglect” does not fit the facts. As I see the position of the Minister at this juncture in this appeal, he is proposing that because the Board has rejected the assertion of the appellant that the funds came from England, and accepted the assertion of the respondent that the funds represented business income, then these facts also justify the imposition of the penalty.

However, the Minister has not eliminated the possibility that the total amount in question, or for that matter even the specific amount referenced and detailed by Mr Di Martile, was left out of the reported income through simple “neglect” even though there were inadequate business records. The lack of satisfactory acocunting records in itself could well justify the imposition of a penalty in certain situations, but this case does not fit within those parameters as I understand them. The appellant has failed to discharge his own responsibility, and the Minister has also failed to discharge the responsibility assigned to him. I would refer to Michael S Mark v MNR, [1978] CTC 2262; 78 DTC 1205, and to Jet Metal Products Limited v MNR, [1979] CTC 2738; 79 DIC 624.

Decision

The appeal is allowed in part so that the penalty levied shall be deleted and the matter referred back to the Minister for reconsideration and reassessment accordingly. In all other respects the appeal is dismissed.

Appeal allowed in part.