Robert Charron v. Minister of National Revenue, [1981] CTC 2271, 81 DTC 271

D E Taylor:—This is an appeal against income tax assessments for the years 1968 to 1973 inclusive, heard in the City of Montreal on February 4 and 5, 1981. The documentation, testimony and evidence presented at the hearing were partly in the French language, partly in the English language. Under those circumstances, after reviewing the areas which appeared most relevant, the Board has decided to write the decision in English. Where a specific reference or quotation in the French language is critical, it will be used but its application in the decision will be immediately noted in English. In assessing, the respondent relied upon the following assumptions of fact:

— Pour les années d’impositions en cause, soit 1968 à 1973, l’Appelant n’a pas déclaré tous les montants de revenu qu’il devait déclarer;

—Ces montants de revenu totalisent une somme de $132,722.82, telle que calculée par conciliation de capital, telle que produite à la présente Réponse pour valoir comme si récitée au long;

— L’Intimé ajouta donc une somme de $17,327.46 de revenu pour chacune des années d’imposition de 1968 à 1971 et un montant de $31,706.48 pour chacune des années 1972 et 1973 et émit une nouvelle cotisation en conséquence.

— During the taxation years in question, 1968 to 1973, the appellant did not declare all the amounts of revenue which he should have declared;

—These amounts of revenue totalled $132,722.82, as calculated by “reconciliation of capital” (not attached—but they were: 1968 to 1973—$69,309.86 and 1972 and 1973—$63,412.96).

—The respondent added an amount of $17,327.46 of revenue to each of the taxation years 1968 to 1971 and an amount of $31,706.48 for each of 1972 and 1973 and prepared new assessments as a result.)

The position of the appellant was:

—Au cours de ces années, une somme d’environ $60,000 a été remise à (’Appelant pour que ce dernier en soit le dépositaire.

—Au cours de ces années, (’Appelant a contracté un emprunt d’une somme approximative de $62,606 qu’il a à son tour prêtée à une tierce personne, soit Bar Horizon Inc.

—Au cours des années 1968 à 1971, (’Appelant a gagné une somme de $10,000 en jouant aux cartes.

— During those years an amount of about $60,000 was left with the appellant in order that he would be the trustee of it.

— During those years the appellant contracted a loan of approximately $62,606, which in turn he loaned to a third party, namely ‘‘Bar Horizon Inc”.

— During the years 1968 to 1971, the appellant gained an amount of $10,000 by playing cards.)

The years 1968 to 1971 inclusive come under the “statute-barred” provisions of section 152 of the Income Tax Act. Penalties were levied under section 163 of the Act in all of the years at issue. Accordingly, the first issue dealt with by the Board was to hear the Minister’s evidence permitting the reassessments for 1968 to 1971. The evidence was presented by Mr Maurice Roy, during the relevant years a special investigator with Revenue Canada. This evidence consisted to a substantial degree of accepting a “Statement of Net Worth” as at December 31, 1971 filed by the appellant with Revenue Canada in 1975—as a result of a formal demand for it, and attempting to reconcile this with his net worth as it could be estimated from net income he had reported each year in his income tax returns from 1968 to 1971. The appellant had not included “statements of net worth” (or balance sheets) when filing these annual tax returns—he had merely filed statements of income. A starting point as at December 31,1967 had been taken by Revenue Canada by using a “Statement of Net Worth” filed by the appellant with the Province of Quebec taxing authorities—it had been received by Revenue Canada on request to the Province of Quebec. It was clear that during the four-year period (1968 to 1971), the appellant’s net worth had increased by an amount of $69,309.86 using these two net worth documents as guides (represented in the reassessments at $17,327.46, which was 25% for each year). The Minister contended that the appellant was a professional gambler (and therefore the $10,000 itself, even if won at cards, was taxable as income); and that the appellant was also in the business of lending money—$59,309.86 ($69,309.86 - $10,000) resulting from a form of interest on loans.

These assertions by the Minister are indeed conclusions which are not difficult to reach from the information gathered and the explanations received by Mr Maurice Roy during the course of his investigation. No one could fault him for holding to just such a position—and putting it forward in making the assessments. However, that is not the problem facing the Minister. The Minister at appeal must do considerably more than present just logical and rational hypotheses in order to re-open a statute-barred year. I am in agreement that the Minister need not prove the cause beyond any doubt, but he must establish that “for the taxation year. . . the taxpayer . . . has made any misrepresentation . . .or. . . fraud in filing the return’’. It is not incumbent upon the appellant in this case to show that indeed he was not a professional gambler, nor that he did not loan money and receive interest during the period 1968 to 1971. The Minister must show on the balance of probabilities that the assumptions as to the source of the alleged discrepancies were warranted. The Minister must also show that the amounts at issue resulted from such activity; that they were received by the appellant; that the amounts so received were income’, and that they were left out of the specific years (each year standing on its own). It must also be shown that in doing these things the taxpayer did not act in a manner consistent with the conduct of a “normally wise and prudent man”. It is my view that where the Minister attempts to accomplish the above tasks on the basis of a ‘‘net worth assessment” (as in this appeal), he faces a formidable endeavour, particularly where more than one statute-barred taxation year is at issue. The special protection accorded taxpayers by virtue of the provisions of section 152 of the Act may not be set aside simply because of unusual or unexplained circumstances, and assumptions which might warrant re-assessment in non statute-barred years. During the years in question the appellant was engaged in several different businesses— apparently all reported satisfactorily in his income tax returns and there are quite detailed financial statements attached thereto—including some balance sheets—for each of these businesses.

In addition to the business income, the Minister did show that the appellant gambled—not that he was a professional gambler; that he may have loaned some money in those years—not that such loans were of the magnitude alleged; and finally the Minister did show that the appellant’s net worth was considerably greater in 1971 than it had been in 1967—but he did not show that there was a direct relationship between this change and unreported taxable income. Further, the Minister made no acceptable effort to support the allocation of the total discrepancy equally to the four years involved. Setting aside the more difficult task of showing “fraud”, for the Minister to establish even “misrepresentation”, some specific amount reported in the appellant’s tax return for a specific year must have been manifested, (see Jet Metal Products Limited v MNR, [1979] CTC 2738; 79 DTC 624). There is no clear formula of which I am aware by which the Minister can be sure he has met his obligation under section 152 of the Act, but my reading of the relevant case law led me to rule directly after the presentation of this part of the appeal that whatever the appropiate level of “balance of probabilities”, it had not been reached in this case.

That left the matter of the non statute-barred taxation years 1972 and 1973 at issue, in which penalties had been applied. The Board informed counsel that the matter would proceed first with the appellant presenting evidence to overturn the assessment of tax, and then the respondent presenting evidence to support the imposition of penalty on that tax (see Peter Rawsthorne v MNR, [1981] CTC 2187; 81 DTC 116).

The explanation provided by the appellant and his corroborating witnesses (Mr Gilles Roy, and the appellant’s wife Madame Rolande Bilodeau Charron) at the hearing, with regard to the availability of the money in question, was—a friend, Mr Roger Fontaine, brought $125,000 in cash to his house in a brown bag in the summer of 1967 and left it with him for safekeeping because he (Charron) was a legitimate businessman. Fontaine had been accompanied by another man known to Charron (Gilles Roy). Fontaine had brought Roy so that he (Fontaine) would have a witness to the transaction. Roy at the time was about 24 years of age. Madame Charron was at home the day Fontaine and Roy arrived—she saw the money that day. Fontaine gave no explanation for making the deposit with Charron, and Charron did not ask for any. After Fontaine left, he (Fontaine) enquired only once or twice briefly about his money. Charron left it in the same paper bag in a clothes closet—unafraid of being robbed himself because of the three big dogs and the gun he kept on the premises. Although he was in the money-lending business, he did not use any of the “Fontaine” money for that purpose. Charron did, however, lend about $60,000 to Bar Horizon during 1973 and 1974 and took it back from Bar Horizon during 1974 and 1975, putting it back in the “sack”. Madame Charron did not enquire at all about the money or have anything further to do with it, but remembered seeing the bag regularly in Charron’s clothes closet when she cleaned the house. It did not disturb her. Gilles Roy never came back to the Charron home for any reason. In 1975—the date was not given with any precision—Fontaine telephoned, said he wanted his money, came alone and picked it up. When Fontaine arrived this time and picked up the money, Charron was alone in the house. A few months after that, Fontaine was dead, apparently under unusual circumstances and of unnatural causes.

Mr François Daoust, “directeur adjoint à la Banque d’Epargne”, residing at Oka, PQ, had been subpoenaed by counsel for the respondent. He testified that he had used the money-lending services of Charron twice. Photostatic copies of two cheques were introduced, one in the amount of $1,175 dated September 6, 1973, the other for $6,200 dated May 31, 1974. Counsel for the appellant objected strenuously to the introducton of the cheque for 1974—that year not being under review. The cheques contained certain references to instalment repayment programs and interest charges. In addition, the following could be noted:

(a) The identification “RC Investment Corp.”* [1] was on the face of each one—directly above the place for signature of the signing officer. The signature was that of Robert Charron.

(b) They were endorsed by François Daoust and by Robert Charron.

(c) In direct examination, Daoust stated he had received the cash from Charron at the time he endorsed the cheques, and in each case an amount substantially less than the face value of the cheque had been received.

(d) Under cross-examination by counsel for the appellant, Daoust was not quite as certain when or if he had received the cash with regard to the cheque made out for $1,175 in 1973, but he was quite certain about the receipt of cash at the time he endorsed it, and for $5,000 rather than $6,200 for the cheque dated in 1974.

Mr. Roger Couture, CA, filed with the Board the corporate tax returns for “Bar I’Horizon Inc” (Bar Horizon), together with the 1973 financial Statements he had prepared. Mr Couture had been the accountant for the owners previous to the time that the appellant, using RC Investments as the parent corporation, acquired Bar Horizon on December 21, 1972. His services had been kept on by the appellant after that date. Certain other information filed by Mr Couture indicated that funds had allegedly been advanced by Charron to Bar Horizon ($62,606) during 1973 and 1974, and returned to him by Bar Horizon in 1974 and 1975.

Findings

Recently, in Rawsthorne v MNR (supra), the Board dealt with the question of reliability of testimony. In that matter (Rawsthorne), the appellant and two corroborating witnesses gave divergent stories with regard to the critical points in their alleged common involvement with a fund of money. Counsel for the Minister thereupon relied heavily on such divergence to detract from the credibility of the witnesses. The Board agreed and dismissed the appeal, but only after pointing out that substantial areas of the documentation, particularly the notice of objection and the notice of appeal, did not coincide with the testimony of the appellant at the hearing.

In the instant case, there is little if any divergence in the basic story of the arrival of the $125,000 as recounted by the appellant and his two corroborating witnesses. Counsel for the Minister in this matter proposed in effect that these three precise and corresponding recollections of the same event were too much alike, and should be discounted. In my view, that proposition from the Minister is without merit—he cannot take two diametrically opposite perspectives on the same point at issue merely because it is convenient. Equally, while the total testimony of Mr Daoust and the two particular cancelled cheques placed in evidence raised many serious questions and do not serve well either the appellant or Mr Daoust, there does remain the one cheque in 1973 (admissibility of the 1974 information and testimony is rejected by the Board). That 1973 cheque was made out apparently on the corporate bank account—RC Investment Corp—not on a personal bank account in the name of the appellant. Despite the reluctance of Mr Daoust to sustain one position, / am satisfied that he received the cash from Charron at the time of endorsement, and that he received $1,000, not $1,175, which was the face value of the cheque. However, at best, that only points to the fact that Charron was in the money-lending business at least through RC Investment Corp; that he handled the transactions for that company himself; and that he may have received $175 from that transaction which was not reported in filing his income tax return. While damaging to Charron’s cause, even that last point is not fatal since it is still a possibility (no evidence either way having been introduced) that the $175 was reported as income (if such it was) by RC Investment Corp.

In summarizing the matter, the most formidable evidence put forward in support of the appellant’s case is that of the three witnesses. Each one of Madame Charron and Mr Gilles Roy was excluded from the hearing during the other’s testimony and during the testimony of Charron regarding the deposit of the $125,000 by Fontaine. That testimony is not overturned by the factors relied upon by counsel for the respondent—the implausibility of the three separate accounts given at the hearing being so precise and similar; the one cheque to Daoust in 1973; and the testimony of Mr Daoust himself. These minor points do not support the Minister’s assumption that an amount of unreported personal income of more than $60,000 was earned by the appellant during the two years in question, from activities related to high interest rates and/or discounted loan proceeds. The direct testimony of the appellant and his two witnesses must by accepted. The Board is fully aware that the explanation provided by the appellant at the hearing regarding the source of the funds at issue is at variance with the explanations provided to the Revenue Canada assessors in the notices of objection and the notice of appeal. That was a point of view considered to be serious in Rawsthorne the three sworn testimony accounts already varied widely. In this matter they do not. I do not overlook or condone the fact that the earlier explanations do cast some doubt on the explanation provided at the hearing but I find no reason to consider those variations as having greater weight against the appellant than the consistency of the explanation given at the hearing should have for the appellant.

The Minister’s assessments for the statute-barred years were not upheld by the Board because the evidence provided by the Minister did not meet the very severe criteria in subsection 152(4) of the Act when it was contrasted against the explanations provided by the appellant in the notices of objection and the notice of appeal for those years. That separate issue and decision apart, the Board now accepts, for purposes of this part of the decision, that a source of funds (as described by the appellant) did exist. However, what is the evidence to support a conclusion that the appellant extracted from that source and introduced into Bar Horizon the amounts in question? The simple answer to that is—except for the direct testimony of the appellant himself, there is no evidence or testimony to support such a contention. Apparently no one ever touched the money again except Charron, and then only when he took some out for Bar Horizon. No one witnessed him returning the money to the “sack” from Bar Horizon, and no one was present when Fontaine arrived to pick it up again. In my view, that is the critical point—whether or not Charron used the money as he says he did (for loan to Bar Horizon), not whether he had such a source of funds available. If the Minister’s evidence had shown as an economic reality the existence of a personal money-lending business with the potential of such lucrative rewards (more than $60,000) during this two-year period, I would not hesitate to accept that as the proper explanation for the discrepancy rather than the assertion from Charron. However, in my view, that is not open to the Board—the evidence has not been presented which would cast doubt upon the claim of the appellant that he did use some of Fontaine’s funds in Bar Horizon. One possible $175 amount from Mr Daoust, related to the business of RC Investment Corp, can not be escalated into approximately the $63,000 at issue in these two years. That is too great an aberration based on the known and admissible facts of this case. Obviously, it would be an even greater aberration to impose penalty upon an assessment of tax made on such unstable grounds.

Decision

The appeal is allowed for all years 1968 to 1973 both as to the assessment of tax and the imposition of penalty. The entire matter is referred back to the Minister for reconsideration and reassessment in a manner not inconsistent with these reasons for decision.

Appeal allowed.