Guy
Tremblay
[TRANSLATION]:—This
case
was
heard
at
Montreal,
Quebec
on
March
11,
1980.
1.
Issue
It
is
necessary
to
determine
whether
the
respondent
correctly
imposed
a
penalty
equal
to
50%
of
the
tax
that
the
appellant
allegedly
sought
to
evade
by
not
filing
his
returns
for
the
years
1971
to
1975.
This
penalty
amounts
to
$20,113.01.
2.
Burden
of
Proof
Under
subsection
163(2)
of
the
Income
Tax
Act
and
section
62(3)
of
the
Income
Tax
Application
Rules,
1971,
the
respondent
has
the
burden
of
proof.
3.
Facts
3.01
The
appellant
was
49
years
old
in
1971
when
he
began
to
operate
a
business
for
clearing
woodlots.
He
continued
to
do
so
during
1972,
1973,
1974
and
1975,
the
years
concerned
in
this
case.
3.02
In
the
preceding
years,
that
is,
from
1964
to
1970,
the
appellant
operated
a
hotel
business
at
Pine
Hill,
County
of
Argenteuil,
Quebec.
At
that
time
he
had
an
accountant
who
completed
his
tax
returns.
This
accountant
died
in
1969
or
1970.
According
to
the
appellant,
although
he
submitted
his
tax
returns
at
that
time,
he
had
no
tax
or
practically
no
tax
to
pay.
3.03
With
respect
to
education,
the
appellant
completed
his
sixth
grade.
In
his
youth
and
subsequently
he
had
worked
with
his
father
cutting
limber.
3.04
Following
the
sale
of
his
hotel,
he
constructed
his
own
house
with
cement
blocks.
In
1971
he
began
a
snowmobile
sales
and
repair
business
in
the
basement.
3.05
He
wished
to
purchase
a
woodlot
in
early
1972,
he
found
one
for
sale
by
Crown
Trust
Company.
He
did
not,
however,
have
sufficient
cash
to
cover
the
purchase
and
the
total
price
was
required
in
cash.
Following
a
meeting
with
representatives
of
the
business,
Benoit
Proulx
and
Sons
of
St-Benôit,
the
owner
of
a
sawmill,
they
loaned
him
$40,000
on
the
following
terms
and
conditions:
(a)
that
the
appellant
sell
exclusively
to
them
all
the
hardwood
located
on
the
lot;
(b)
that
payments
be
made
in
instalments
of
$2,000
per
month
plus
interest;
(c)
that
a
mortgage
of
$40,000
be
registered
on
the
land.
The
appellant
accepted
these
conditions.
Moreover,
the
remainder
of
the
lumber
was
cut
and
the
pulpwood
was
sold
at
Hawkesbury,
Ontario.
3.06
During
the
same
year
he
purchased
a
second
woodlot
from
an
estate,
the
Carrière
estate.
The
price
was
also
$40,000.
He
paid
$1,000
cash,
leaving
a
mortgage
of
$39,000,
of
which
$10,000
plus
interest
was
payable
per
year.
The
heirs
of
the
estate
also
owned
a
sawmill.
They
too
required
that
the
billets
of
hardwood
be
sold
to
them.
3.07
Following
the
sale
of
the
hardwood
to
the
two
former
owners
of
the
sawmill,
they
paid
for
it
minus
the
sums
owed
by
the
appellant.
3.08
The
appellant
also
purchased
several
pieces
of
machinery
(trucks,
a
bulldozer
and
so
on)
with
money
borrowed
from
finance
companies
at
the
appropriate
interest
rates
(from
18
to
20%,
according
to
him).
3.09
Several
other
woodlots
were
also
purchased.
3.10
The
appellant
gave
the
task
of
cutting
the
wood
to
jobbers.
Thus
the
appellant
did
not
have
any
employees
in
the
normal
sense
of
the
word,
although
at
any
given
time
15
or
so
men
could
have
been
working
in
his
woodlots.
3.11
The
appellant
maintained
that
he
worked
15
hours
per
day
in
1974.
From
1971
to
1976
the
appellant
did
not
have
an
accountant.
He
did
not
see
the
need
to
file
tax
returns
because,
according
to
him,
he
was
not
subject
to
tax.
At
the
end
of
each
year,
in
fact,
he
had
rather
substantial
debts.
He
felt
therefore
that
he
could
not
have
to
pay
income
tax.
In
1974
he
allegedly
paid
from
$3,000
to
$4,00
per
month
in
accounts.
3.12
At
the
end
of
the
years
1972
to
1975
the
appellant
owed
the
following
total
amounts:
1972:
$83,000,
1973:
$110,301;
1974:
$113,034;
1975:
$61,657
in
addition
to
what
he
owed
to
his
suppliers
of
gasoline,
oil
and
rolling
stock
spare
parts
and
his
debts
to
insurance
companies,
sub-contractors
and
so
on.
The
above-mentioned
totals
with
details
of
each
creditor
and
the
amount
he
was
owed
were
given
to
the
Board
by
Mr
Fernand
Rheault,
CA.
3.13
In
1975
the
appellant
began
to
sell
lots.
These
lots
were
situated
on
one
of
his
woodlots
that
had
been
cleared
on
which
there
was
a
lake.
The
appellant
sold
from
50
to
60
lots
around
this
lake
for
the
purpose
of
constructing
cottages.
He
also
sold
some
machinery
in
the
same
year.
3.14
The
other
lots
(after
the
wood
had
been
cleared)
did
not
sell,
even
though
the
price
was
only
$10
or
$15
per
acre.
According
to
the
appellant,
they
would
increase
in
value
only
in
25
or
30
years
because
of
the
trees
that
would
then
be
there.
3.15
Following
the
sales
of
lots
and
machinery,
however,
the
appellant
began
to
overcome
his
difficulties
(Mr
Fernand
Rheault,
CA,
testified:
“This
is
what
saved
him”).
He
then
thought
that
he
might
be
subject
to
tax.
At
a
meeting
with
an
accountant
in
Lachute,
Quebec
in
1975,
the
appellant
described
his
business
and
the
state
of
his
books.
The
accountant
replied:
“I
would
rather
be
in
my
shoes
than
in
yours”
and
refused
to
bring
order
into
his
affairs
by
setting
up
a
system
and
taking
charge
of
his
tax
returns.
3.16
In
the
summer
of
1976,
in
August,
at
a
meeting
with
the
accountant
Mr
Fernand
Rheault
(whose
residence
was
situated
three
miles
from
the
appellant’s
business),
he
told
him
also
about
the
state
of
his
accounts
and
asked
him
to
examine
them.
“After
an
afternoon
of
discussions”,
Mr
Rheault
wrote
(in
a
letter
to
the
respondent
dated
December
21,
1977,
filed
with
the
notice
of
appeal,
the
contents
of
which
were
to
the
same
effect
as
Mr
Rheault’s
testimony):
it
became
clear
to
us
that
we
would
need
a
very
large
number
of
notarized
documents
and
bank
statements
if
we
were
to
perform
any
valid
work.
We
therefore
asked
Mr
Herve
Gagne
to
provide
the
following
documents:
1.
All
his
and
his
wife’s
bankbooks
and
all
the
cheques
paid;
2.
All
notarized
deeds
of
purchase
and
sale
of
lots.
These
documents
were
read
and
checked
together
with
our
summaries
by
the
assessor
Mr
Walter
Murkens;
3.
Copies
of
the
many
contracts
for
the
purchase
of
equipment
and
rolling
stock
financed
by
IAC,
GMAC
or
FMCC
and
Niagara
Finance;
4.
All
details
of
loans
from
the
Brownburg
Caisse
populaire
and
so
on.
These
documents
were
located
all
over
the
place
in
drawers,
trucks
and
so
on.
He
promised
the
appellant
that
he
would
conclude
the
work
early
in
1977
and
that
he
would
file
income
tax
returns
for
the
years
in
question.
According
to
Mr
Rheault,
he
had
to
check
between
70
and
75
notarized
contracts.
3.17
In
November
1976
the
appellant
received
from
the
respondent
a
TX14
demand
for
his
income
tax
returns
from
1972
to
1974
(Exhibit
I-10).
3.18
On
March
18,
1977
the
tax
returns
for
the
1971
to
1976
years
were
filed.
Because
of
the
defective
accounting
system
the
statements
of
income
were
prepared
by
the
so-called
net
worth
method,
in
this
case
therefore,
from
the
difference
between
the
balances
calculated
as
of
December
31,
1970
and
December
31,
1975.
3.19
Following
the
filing
of
these
returns,
Mr
Rheault
received
a
visit
from
the
Department’s
auditor,
Mr
W
Murkens.
Mr
Rheault
informed
him
that
after
filing
the
returns
he
had
obtained
additional
information
enabling
him
to
correct
the
balance
as
of
December
31,
1970,
reducing
the
net
worth
by
$13,000.
This
statement
was
made
to
the
auditor
before
witnesses.
This
correction
produced
an
increase
in
income
by
this
amount
in
the
years
in
question;
the
income
originally
reported
and
the
corrected
income
were
as
follows:
|
Reported
|
Corrected
|
1971
|
$
9,556.16
$
16,473.23
|
1972
|
24,442.69
|
27,009.24
|
1973
|
38,321.19
|
42,555.50
|
1974
|
49,411,10
|
54,749.44
|
1975
|
41,893.36
|
42,213.59
|
|
$163,624.50
|
$183,001.00
|
3.20
On
November
7,
1977
the
appellant
signed
the
following
statement
at
the
foot
of
the
financial
statement
prepared
by
the
respondent,
giving
the
increase
in
income
as
corrected:
I
understand
and
accept
the
corrections
to
be
made
in
the
above-mentioned
returns
and
the
subsection
163(2)
penalty
on
the
additional
tax.
This
subsection
163(2)
provides
for
a
25%
penalty
on
the
additional
income
subject
to
tax
because
of
fraud
or
negligence
amounting
to
gross
negligence.
3.21
On
May
18,
1978
the
respondent,
in
issuing
notices
of
assessment
for
the
years
concerned,
imposed
the
penalty
equal
to
50%
of
the
total
tax
determined
under
subsection
163(1).
These
penalties
were
as
follows
(Exhibit
I-3):
1971:
|
$1,351.74
|
1972:
|
2,952.34
|
1973:
|
$5,123.82
|
1974:
|
$6,376.71
|
1975:
|
$4,308.40
|
3.22
Following
a
notice
of
objection
filed
on
July
22,
1978
the
respondent
notified
the
appellant
on
December
13,
1978
that
the
said
assessment
was
confirmed.
3
53
On
March
6,
1979
the
appellant
filed
his
notice
of
appeal
with
the
Tax
Review
Board.
4.
Act,
Case
Law,
Comments
4.1
Act
The
principal
legislative
provisions
involved
in
this
case
are
subsections
1°63(1)
and
(3).
These
provisions
read
as
follows:
163(1)
Every
person
who
wilfully
attempts
to
evade
payment
of
the
tax
payable
by
him
under
this
Part
by
failing
to
file
a
return
of
income
as
and
when
required
by
subsection
150(1)
is
liable
to
a
penalty
of
50%
of
the
amount
of
the
tax
sought
to
be
evaded.
(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.
4.2
Case
law
It
was
the
respondent
who
cited
all
the
case
law.
This
was
as
follows:
1.
The
Queen
v
George
E
Pavely,
[1976]
CTC
4771;
76
DTC
6415;
2.
The
Queen
v
Walter
Thistle,
[1974]
CTC
798;
74
DTC
6632;
3.
R
v
Greer
(1974),
13
CCC
(2d)
318;
4.
R
v
Baker
(1974),
16
CCC
(2d)
126;
5.
The
Queen
v
William
Arthur
Branch,
[1976]
CTC
193;
76
DTC
6112;
6.
Cirillo
et
al
v
Com
et
al,
US
Tax
Cases,
cited
63-1,
87,
764,
7.
Stoltzfus
et
al
v
US,
US
Tax
Cases,
cited
67-1
83,
697;
8.
Stoltzfus
et
al
v
US,
US
Tax
Cases,
cited
68-2
87-711;
9.
Yves
Cloutier
v
The
Queen,
[1978]
CTC
702;
78
DTC
6485;
10.
Antal
Susztek
v
MNR,
[1978]
CTC
2959;
78
DTC
1690;
11.
Peter
Elchuk
v
MNR,
[1970]
CTC
326;
70
DTC
6235;
12.
Légaré
Foundry
Ltd
v
MNR,
36
Tax
ABC
351;
64
DTC
696;
13.
Chester
C
Isherwood
v
MNR,
36
Tax
ABC
420;
64
DTC
728;
14.
Ross
M
Lymburner
v
MNR,
[1970]
Tax
ABC
765;
70
DTC
1514;
15.
Judgment
rendered
by
Mr
R
St-Onge,
Member
of
the
Board,
on
February
11,
1980
in
Jean-Louis
Tessier
v
MNR.
4.3
Comments
4.3.1
Subsection
163(1)
cited
supra,
which
is
at
the
heart
of
this
case,
lays
down
that
the
50%
penalty
is
imposed
when
a
person
wilfully
attempts
to
evade
tax
by
failing
to
file
a
tax
return
as
and
when
required.
4.3.2.
The
respondent
has
the
burden
of
proof.
In
the
opinion
of
the
Board,
such
proof
does
not
have
to
be
beyond
a
reasonable
doubt,
but
a
preponderance
of
evidence
will
suffice.
4.3.3
According
to
the
respondent’s
evidence,
the
appellant
did
not
file
his
returns
for
the
years
1971,
1972,
1973,
1974
and
1975
until
1977,
at
the
same
time
as
his
1976
tax
return.
The
penalty
was,
of
course,
not
imposed
on
this
last
year
since
the
return
was
filed
on
time.
4.3.4.
According
to
the
respondent,
it
was
after
a
demand
to
file
his
returns,
made
in
November
1976
on
a
TX-14
form,
that
the
appellant
filed
his
returns.
4.3.5
In
his
testimony,
however,
the
appellant
stated,
and
this
was
confirmed
by
his
accountant,
that
it
was
in
August
1976
that
he
gave
the
accountant
the
task
of
filing
his
tax
returns.
Becuase
of
the
immense
amount
of
work
that
the
accountant
had
to
do
(par
3.16),
the
returns
were
filed
only
in
March
1977.
4.3.6
The
appellant
argued
that
he
failed
to
file
them
on
time
each
year
in
accordance
with
the
Act
because
he
thought
he
did
not
have
to
pay
any
tax.
Is
it
possible
for
a
person
with
reported
taxable
income
totalling
$163,624.50
for
the
five
years
to
have
acted
bona
fide?
The
appellant
did
not
have
an
accounting
system
and
this
amounted
to
gross
negligence,
although
this
is
not
in
itself
evidence
of
his
intent
to
evade
tax.
The
appellant,
who
left
school
after
grade
six
and
who
at
the
end
of
the
years
from
1972
to
1975
owed
a
total
of
$367,992.00
made
up
of
$83,.000
in
1972,
$110,301
in
1973,
$113,034
in
1974
and
$61,657
in
1975,
could
not
distinguish
between
capital
debts
and
current
expenditures.
He
believed
he
was
not
subject
to
tax.
4.3.7
In
1975
the
appellant
asked
an
accountant
to
bring
his
books
up
to
date
and
to
file
his
tax
returns.
This
accountant
refused.
In
August
1976
he
entrusted
his
business
to
the
accountant
Rheault.
The
latter
agreed
on
the
conditions
that
he
explained
(para
3.16).
In
November
he
received
from
the
respondent
a
demand
to
file
his
tax
returns.
4.3.8
Does
all
this
evidence
show
that
the
appellant
wilfully
attempted
to
evade
tax?
The
Board
could
more
easily
have
upheld
a
penalty
for
gross
negligence
under
subsection
163(2).
With
respect
to
upholding
a
penalty
imposed
on
the
basis
that
the
appellant
wilfully
attempted
to
evade
tax,
the
Board
has
a
reasonable
doubt
and
this
must
apply
in
the
appellant’s
favour.
5.
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.