Isadore Waxstein v. Minister of National Revenue, [1980] CTC 2398, 80 DTC 1348

The Assistant Chairman:—This appeal was called for hearing recently at the City of Vancouver, BC. The appellant appealed to this Board from an assessment for income tax for each of the years 1973, 1974 and 1975. The respondent, apparently not satisfied with the income reported by the appellant, had decided to determine the appellant’s income on a net worth basis. Officers of his Department prepared an opening balance sheet of the appellant for January 1, 1973 and a closing balance sheet for each of the years 1973, 1974 and 1975. In this way the respondent ascertained an increase in net worth in each of the years 1973, 1974 and 1975. The Minister then determined the appellant’s personal expenditures for each year— which consisted, inter alia, of expenditures for food, clothing, entertainment, insurance, holiday, etc. In addition, deductions were noted for income tax, Canada Pension Plan contributions and unemployment insurance premiums as well as tax refunds and a gift from his mother. The result was an apparent increase in net worth. Since the apparent total income was greater than the reported income in each year, the Minister reassessed the appellant on the new gross income. Not only did the respondent assess additional tax over that assessed based on the reported taxable income but he also assessed a penalty pursuant to subsection 163(2) of the Income Tax Act (after tax reform). The tax assessed not only included what is called federal tax and penalty pursuant to subsection 163(2) of the said Income Tax Act but also income tax of the Province of British Columbia and a similar penalty under its statute.

Unfortunately, in my opinion, in this case as in many appeals I am called upon to hear which involve points of law or complicated issues, it is presented by a person not of the legal profession but by the appellant himself. He described himself as in “sales”. An effort was made to explain to the appellant the intricacies of the law to which he was subjecting himself and it was suggested that, while he was entitled to act for himself, it might be wiser to get an adjournment and seek legal counsel. After having been advised that I, as the presiding member, was at the hearing as the judge to determine the issues, both fact and law, and not present as his counsel or advocate, the appellant demurred and stated he wished to go on. I called for the case to proceed.

Counsel for the Minister, in the circumstances, then mentioned the “net worth” determination of the appellant’s income and the assessment of penalty pursuant to subsection 163(2) of the said Income Tax Act and made reference to subsection 163(3).

Subsections (2) and (3) of section 163 reads as follows:

(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made, or has participated in, assented to or acquiesced in the making of, a statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

(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 assesment of the penalty is on the Minister.

The consideration of subsection 163(3) proceeded in the absence of any assistance from the appellant (as mentioned, he was not presented by legal counsel). I asked counsel for the Minister who was to proceed, the appellant or the respondent. In a normal appeal where there has been no penalty imposed and where the assessment under appeal has been made less than four years from the date of the original assessment for that year, the onus is on the taxpayer as all should well know since the case of R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182. If the assessment under appeal was made more than four years after the original assessment for that year and there has not been a waiver pursuant to subparagraph 152(4)(a)(ii), then the Minister must show, in the terms of subparagraph 152(4)(a)(i) that the appellant

has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act,

before that appellant is called upon to show the assessment is incorrect.

This appeal does not involve what is usually referred to as a “statute- barred reassessment”. All reassessments under appeal were within four years of the date of the original assessments for the same years. Hence, there is no onus on the Crown.

Now we have an appeal where there is no question of a “statute-barred reassessment” being involved but we have a penalty within the ambit of subsection 163(3).

The appellant could not make any submission on this point. It is a point of law. Respondent’s counsel submitted that the assessments are valid, there is no question of them being statute-barred and so the appellant must show the assessments of tax (he went no further) are wrong.

On the determination of that issue, if the appellant is successful entirely then there is no alternative but for me to allow the appeal and, pursuant to subparagraph 171 (1 )(a)(ii) of the said Income Tax Act, refer the assessments back to the Minister to be varied by deleting the increased income and the penalty from the assessments of the appellant. However, should the appellant not be successful at all, or only partially, then the onus is on the respondent to show that all ingredients of subsection 163(2) are present to justify the imposition of the penalty on the amount which the appellant failed to show was not income.

As authority for his position, counsel for the respondent referred to the case of Claude Piette v MNR, [1979] CTC 2577; 79 DTC 425, a decision of my colleague, Mr Tremblay. In that case the assessment was similar—a net worth assessment with a subsection 163(2) penalty. A headnote of that case reads as follows:

The taxpayer bought and sold six houses, but never reported the profit in his income tax returns. The Minister, using net worth assessments, added certain amounts to the taxpayer’s incomes for 1972, 1973 and 1974, and also assessed a penalty. The taxpayer appealed to the Tax Review Board against both the additions to income and the penalty. He contended that the assessments failed to give adequate consideration to large gambling gains made by him and that he failed to report the house profits because he was not familiar with new income tax provisions.

Held: The taxpayer’s appeal was dismissed. While it was apparent that the taxpayer had made successful gambling trips to Las Vagas, he failed to present sufficient evidence to corroborate his alleged winnings. The taxpayer failed to discharge the onus of showing that the Minister’s assessments were wrong. Being a businessman, the taxpayer should have known that capital gains on house sales were taxable. The Board found no reason to disturb the Minister’s imposition of penalty. The taxpayer’s appeal was therefore dismissed.

As to the onus question, counsel referred to those portions in the reasons entitled “1. Point at Issue” and “2. Burden of Proof”, which read as follows:

1. POINT AT ISSUE

The question is whether the respondent is justified in refusing to accept the statements of the appellant that in the space of 18 months, from the end of 1972 to June 1974, he won from $45,000 to $52,000 gambling in Las Vegas. In addition, the respondent imposed a penalty of 25 per cent for misrepresentation of facts in the appellant’s tax return due to gross negligence or deliberate omission.

2. BURDEN OF PROOF

The burden is on the appellant to show that the respondent’s assessments 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 R HZ S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

He sumbitted that #1 sets forth the issues as they exist in this case, and point #2 the onus.

I then suggested to him (since the appellant in this case had no legal representation, as I have already said twice in these Reasons) that there appeared to be no suggestion of the application or interpretation of subsection 163(3). As to “2. Burden of Proof” resolving the onus question —Is there any diference in that onus since subsection 163(3) was put into the Act? Is it not saying what I said with respect to general onus on the routine assessment?

I also referred to the Piette case (supra) as follows:

The Board must therefore uphold the assessment relating to the amounts included in the appellant’s income.

With respect to the penalties, in the case at bar they are so closely connected to the principal question that the one leads to the other. If the Board arrives at the conclusion that the appellant did not commit fraud or gross negligence, this is because it has concluded that, in view of the evidence given, the amount of $45,000 was won gambling. However the evidence did not actually convince the Board of this. From a logical point of view, it cannot annul the penalty. In the case at bar, once again, the Board does not feel it can separate the two.

This leads me to believe that the question I have raised and which was discussed by counsel and me, was not raised in the Piette appeal, nor was it considered at all.

My suggestion to counsel for the respondent was that his approach to onus was in effect saying I should hear the same case at least in part twice. I suggested to him that, were I to follow his approach and find for example (following the Johnston case (supra)) that the amount added was income, then with respect to penalty I would have to hear him (the Crown) again to prove that the income, alleged by the respondent to be unreported by the appellant, was income, and then determine it was left off in such circumstances as to fulfill the requirements of subsection 163(2). He agreed.

I then queried counsel for the respondent on what authority I could rely to prevent him from cross-examining the appellant after the appellent had given evidence with respect to the first part of the case, as suggested by counsel for the respondent, and bringing out facts relevant to the second part—negligence—to establish that the “income” was negligently left out of his return. The latitude of cross-examination presumably must be very wide. It would seem to me that an answer by the appellant to a question on cross-examination could clearly satisfy subsection 163(2). Counsel still rested on the position he mentioned earlier.

It became necessary for me to make a ruling before the appeal could proceed. Subsection 163(1) had its equivalent in subsection 56(1) of the Income Tax Act, RSC 1952, c 148 as amended. Subsection 163(2) had its equivalent in subsection 56(2). Subsection 163(3) has no predecessor.

I am of the opinion that the respondent must do something now which he did not have to do prior to tax reform. If this were an assessment in the same circumstances made for say 1965 (long before tax reform), the appellant must rebut all. This however is after tax reform and, to give meaning to subsection 163(3), I ruled the Crown must prove the right to assess all or part of the penalty assessed. If the Crown does so then the appellant must show the increase is not income, which I believe is an impossibility. Following that determination, the onus is on the appellant to show the assessments of “income” are incorrect.

I then ruled that the Crown must proceed to establish its right to show the penalty was proper. If it does not establish any right at all, I stated I would at least allow the appeal and remit the assessments to the respondent for reassessment to vary the assessments by deleting the penalty. Counsel advised he had no evidence to present and so I give the order stated above.

Following the above ruling, the appellant gave his evidence. There having been no suggestion as to how the appellant could have increased his net worth nor any suggestion that the appellant was incredible, I allowed the balance of the appeal.

The result is, judgment will go allowing the appeal and referring the assessments back to the respondent for variation to delete all increases by the “net worth’’ reassessments and all penalties.

Appeal allowed.