Louis-Rheal Tremblay v. Minister of National Revenue, [1981] CTC 2483, 81 DTC 425

Guy Tremblay [TRANSLATION]:—This case was heard on December 14, 1979 at Montreal, Quebec.

1. Point at Issue

The chief point is whether the appellant, a practising lawyer, was correct in objecting to the inclusion in his income of the following amounts: $12,761.56, $1,293.98 and $3,763.08 for the years 1973, 1974 and 1975 respectively. Respondent argued that they were fees. Appellant contended that the amounts were a capital refund or bank account transfer. The second point is whether respondent was correct in imposing penalties for gross negligence of $785.68, $99.03 and $225.03 for the years 1973, 1974 and 1975 respectively.

2. Burden of Proof

The appellant has the burden of showing that the assessments of the respondent are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

This burden of proof which rests with the appellant also requires that he demonstrate that presumed facts on which the respondent relied in arriving at the assessments made were incorrect.

These presumed facts are described in paragraph 7 of the respondent’s reply to the notice of appeal. They read as follows:

In assessing the appellant for the 1973, 1974 and 1975 taxation years the respondent relied, inter alia, on the following presumptions of fact:

(a) the appellant is a lawyer, and as such must declare his income in accordance with the method prescribed by the Income Tax Act-,

(b) the appellant declared his income in accordance with the deposit method for each year;

(c) in addition to his trust account, the appellant had, for 1975, an account with the Provincial Bank, and for 1973 and 1974, an account with the Provincial Bank and an account with the Bank Canadian National:

(d) in calculating his income for 1973, the appellant included monies deposited in his trust account, amounts which were not taken into account by the respondent;

(e) for 1973, the appellant declared $44,836.31, representing the total of his deposits in accounts other than the trust funds, less cheques returned and loans; following an audit the Minister of National Revenue found $60,289.09 and taxed the difference;

(f) the trust account showed withdrawals for 1974 and 1975 payable to cash or as a contribution to a registered home ownership savings plan; the Minister of National Revenue, by assessments in April 1977, taxed these amounts as unreported income:

1974	$2,340,24
1975	$2,710.00

(g) following the filing of notices of objection, the respondent reduced the additional income for 1973 by an amount of $2,691.19; this amount represented income already taxed in 1972 using the special method employed by the appellant;

(h) the Minister of National Revenue calculated the appellant’s deposits for 1974 and deducted from reported income the sum of $1,046.26;

(i) the total of deposits in the Provincial Bank account for 1975 showed a difference of $1,053.08, which was added to the appellant’s income;

(j) the appellant provided no explanation as to the difference between the total of deposits as calculated by the Minister of National Revenue and the total of reported deposits.

So far as penalties are concerned, the burden is on the respondent to show that the appellant “knowingly, or under circumstances amounting to gross negligence” made omissions in his tax return, the whole as provided in subsections 163(2) and (3) of the Income Tax Act.

Facts

3.01 Appellant was a lawyer, a member of the bar of the province of Quebec, during 1973, 1974 and 1975.

3.02 During 1973, 1974 and 1975 he reported the following net income:

3.03 Following an investigation and the issuing of two reassessments dated April 8, 1977 and November 29, 1977, the Minister of National Revenue disallowed certain expenses and added certain investment income (which is not on appeal). He further added to and reduced income from fees, as appears below and these amounts are on appeal

3.04 The appellant testified that the reported income was compiled based on two ordinary bank accounts and a bank account in trust. However, he did not give, either by verbal explanations or by the filing of a financial statement, any figures showing the source of the gross income from fees: $44,836.31 in 1973, $53,527.64 in 1974 and $21,460 in 1975, as reported by him for the said years.

3.05 Furthermore, by compiling the deposits in the said ordinary bank accounts and adding the cheques on the in trust account made out to “cash”, the respondent arrived at the additional income shown in paragraph 3.03 above.

3.06 With respect to 1973, however, the appellant testified that the respondent added to his income amounts which he argued had been taxed twice:

twice:

(a) a cheque for $400 (Exhibit A-2) on January 29, 1973 was transferred from the ordinary account at bank A to the ordinary account at bank B; the statement for the bank B account to Janaury 31, 1973 was filed (Exhibit A-1);

(b) an amount of $700 was deposited to account B (Exhibit A-4) on March 9, 1973, the result of a loan from his partner; it was returned by him on March 23, 1973; as no evidence of a loan was presented nor was the cheque of his partner filed, and the latter did not testify, counsel for the respondent objected to the evidence: the cheque made out to his partner Gilles Thouin was filed (Exhibit A-4);

(c) on July 10, 1973 he sold his wife’s property for $45,000, $15,556.66 of which was paid in cash (Exhibit A-3); according to the appellant, he deposited $13,000 in his bank account, but there was no evidence to confirm this deposit;

(d) on July 11 and 25 the amounts of $3,800 and $500 were allegedly transferred from his wife’s account to the appellant’s account; on August 9 and 16, 1973 deposits of $600 and $800 were made in the bank B account, the result of a loan from his wife; the wife was not called to confirm her husband’s testimony, and no cheque was filed: only the bank account (Exhibit A-5) was filed showing the deposits;

(e) Exhibit A-6 shows a deposit of $1,000 on October 30, 1973, and this was probably another loan from his wife by an account transfer.

3.07 With respect to 1974, the appellant described the following transactions:

(a) on May 10, an amount of $343 was deposited to account A (Exhibit A-8), and this amount allegedly came from his in trust account; however, no document relating to the latter account was filed;

(b) on April 23, an amount of $600 (Exhibit A-11), and on December 12, an amount of $150 (Exhibit A-9) were deposited to the said account A, and allegedly came from the in trust account; but no document was filed relating to the latter account either.

3.08 With respect to 1975, the appellant maintained that with regard to the amount of $2,710 added to income (para 3.03), an amount of $1,000 came from the in trust account.

3.09 The appellant contended that certain clients wished to be paid in cash from his in trust account — but no specific evidence was presented.

4. Act — case law — comments

4.1 Act

The legal provisions concerned in the case at bar are ss 3, 9 and 34 of the Income Tax Act. They will be cited if necessary.

4.2 Case law

The judgments referred to by the respondent are as follows:

1. Dame Bourduas v Ouimet, [1973] CA 163;

2. Chandler v Federal Alcohol Distillery Ltd et Régistrateur de la Division d’Enregistrement de Montréal et Goyette (1930), 49 QB 47;

3. Corbeil et al v Corbeil (1939), 67 QB;

4. Freudenthal v Big ras (1929), 47 QB 340;

5. Frigidaire Corp v Dame Malone (1933), 54 QB 462;

6. Guay v Dame Beaudoin, [1957] QB 252;

7. Kuplenik v Mezan (1939), 66 QB 285;

8. Désiré Laliberté v Auguste Langelier, [1900] QB 398;

9. Maloney v Maloney (1926), 40 QB 319;

10. Matte v Matte, [1962] QB 521;

11. Proulx v Dame Gélinas et vir, [1950] CS 78;

12. Rioux v Rioux et Frères Inc, [1969] QB 333;

13. Nathan Robins v MNR, [1963] CTC 27; 63 DTC 1012;

14. Troster v British Rubber Co of Canada Ltd, [1943] QB 248;

15. Jacques Béique v HMQ, [1978] CTC 646; 78 DTC 6452;

16. MNR v Robert P Ouellette et John Edward Brett, [1971] CTC 121; 71 DTC 5094:

17. Robert P Ouellette et John Edward Brett v MNR, [1975] CTC 111; 75 DTC 5075.

4.3 Comments

4.3.1. Personally, the member hearing the case at bar is inclined to think that the appellant was speaking the truth in his testimony. However, in his capacity as the official responsible for the hearing, before a Board which is bound by the weight of the evidence, he cannot in general accept the evidence. The appellant did not shift the burden of proof on all points.

With regard to the points that the appellant sought to prove (described in paragraphs 3.06, 3.07 and 3.08), concerning primarily account transfers and loans from his wife and his partner, in general no evidence was presented to confirm the appellant’s statements. Neither the wife nor the partner testified as to the loan made. In the case of the account transfers in general, only evidence of the deposits was presented.

It would appear to the Board that more complete evidence was possible.

The courts have long held that evidence of the existence of a fact must be corraborated. The evidence of a deposit in a bank account is not sufficient to prove a loan by this or that individual, or a transfer from another account, unless a statement of that other account is filed or a loan contract (or the lender’s cheque) and at least testimony from the lender is provided.

4.3.2. In the case at bar, the evidence was actually completed on one point, namely that of paragraph 3.06(a), regarding the sum of $400 transferred from one bank account to another. A photocopy of the two bank accounts was filed.

In the case of the amount of $700 (para 3.06(b)), loaned by the partner, there should have been testimony by the partner or at least the cheque showing the loan for the evidence to be properly completed. However, since the appellant filed the cheque by which he paid the said amount of $700 to his partner, and since subsection 9(2) of the Tax Review Board Act provides that “appeals shall be dealt with by the Board as informally and expeditiously as the circumstances and considerations of fairness will permit”, the Board accepts the evidence despite its weakness.

The Board accordingly allows the appeal on these points.

4.3.3 Further, the appellant compiled his income by the cash receipts and cash disbursements system, whereas under the Income Tax Act he should have compiled it by the fiscal year system, that is, taking into consideration accounts receivable and accounts payable at December 31 of each year.

The appellant, who is a businessman, could not have been unaware of this provision of the law and [of the need to] keep the proper system of accounts.

4.3.4 The appellant committed gross negligence, at least with regard to 1973, in failing to keep the proper system of accounts. The amount by which the income was reduced — namely $11,661.56 ($12,761.56 less $1,200 ($400 + $700) = $11,661.56) - is sufficiently large to indicate more than ordinary negligence, that is, gross negligence.

5. Conclusion

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

Appeal allowed in part.