Jean-Guy Papillon, Paul Papillon v. Minister of National Revenue, [1980] CTC 2420, 80 DTC 1355

Guy Tremblay [TRANSLATION]:—These cases were heard at Quebec City, Quebec on September 11, 1978. Following filing of pleadings by the parties, the case was taken under advisement on May 20, 1979.

1. Point at Issue

During the 1961 to 1971 fiscal year inclusive, the appellants carried on a garage business in partnership under the name Papillon & Frères Enr. It must be decided whether the appellants are justified in appealing against the respondent’s assessment, which included in each partner’s income computation an additional amount of $72,948.83 for all the years in ques- tion. It is the appellants’ contention that the respondent, in determining these amounts, did not take account of expenses of $91,936 related to the business and incurred for the purpose of earning income.

2. Burden of Proof

The appellants have the burden of showing 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 W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 Messrs Paul Papillon and Jean-Guy Papillon (who were 60 and 53 years of age respectively at the time of the hearing in 1978) were partners during the 11 fiscal years 1961 to 1971 under the name Papillon & Frères Enr.

3.02 They conducted a garage business at St-Basile, Portneuf County, province of Quebec.

3.03 The garage’s main customer was St-Basile Transport Inc, a transport company. The two appellants owned 66-2/3 of the shares of this company until 1963, when the shares were sold to Gustave Papillon, their cousin, who already owned 33-1/3 of the shares. The company’s offices were at the same location and in the same premises as those of the partnership.

3.04 The partnership’s income was derived from gasoline sales and repairs.

A. The respondent's assessments

3.05 As the result of an audit conducted by the respondent’s officers, the respondent, in notices of reassessment issued on January 29, 1975, added the following amounts to the income of Papillon & Frères Enr (on the basis explained below):

1. Unreported gross sales (other than gasoline)

(Exhibit I-3)		$93,049.07
2. Overclaimed purchases	$1,804.90
3. Capital item claimed in purchases	$2,165.19
4. Expenses disallowed	$4,041.70
5. Travel expenses refunded by St-Basile
Transport Inc	$5,695.76	$13,707.55
6. Gasoline sales concealed by the appellants
(Exhibit I-4)		$52,894.04
TOTAL		$159,650.66

3.06 However, the respondent allowed the following expenses against the income detailed above:

— Capital cost allowance

(Re: partners’ automobiles)	$ 8,667.79
— Gasoline consumption
(Re: welding machines and tractors)	$ 2,761.52
— Gasoline consumption
(Re: partners’ automobiles)	$ 2,323.68
	$13,752.99

3.07 The respondent also added to Jean-Guy Papillon’s income an amount of $1,458 in respect of unreported interest income.

3.08 The net total addition income computed by the respondent and detailed in paragraphs 3.05, 3.06 and 3.07 amounts to $147,355.67. An amount of $72,948.83 was added to the income of the appellant Paul Papillon and $74,406.84 was added to the income of the appellant Jean-Guy Papillon.

A. The appellants’ contention

3.09 The appellants did not deny that they failed to report the additional income determined by the respondent.

3.10 However, at the hearing the appellants attempted to establish amounts which should be deducted from income and substantiate the deduction of the following additional amounts:

During the hearing, the appellants admitted that an amount of $2,323.68 under the heading “Automobile expenses” had been claimed twice. The figure of $47,820 should therefore be reduced to $45,496.32. The grand total of $93,259 should also be reduced to $90,935.32 (Transcript, pp 132 and 133).

The appellants contended that the additional income should thus be reduced to $56,877.68 or $28,438.84 for each appellant, plus $1,458 interest income added to the income of the appellant Jean-Guy Papillon.

C. Insurance costs and other expenses related to the appellant’s personal automobile: $6,215 and $47,820

3.11 In computing the net income of Papillon & Frères Enr for inclusion in their tax returns, the appellants deducted $24,045.61 in respect of insurance premiums. They now claim an additional deduction of $6,215 as follows:

3.12 The additional insurance premiums claimed are those paid by the appellants on their personal automobiles.

The accountant Gilles Doré, CA, of the firm Fortier, Hawey & Cie, who has been the appellants’ accountant since 1973, testified that at the time of the first audit of the books of Papillon & Frères Enr he noted “that the accounting system was quite inadequate’’ (Transcript, p 64). He introduced an improved system. There had previously been no vouchers to substantiate expenses. It was not an easy task to review the figures in the respondent’s assessments. “It must be remembered”, Mr Doré observed, “that at that time we had no documents or vouchers to establish the amounts of expenses for 1961 to 1971 inclusive” (Transcript, p 71).

Mr Doré did not perform any audit of the insurance premiums on the appellants’ personal automobiles for the years 1961 to 1971: “Mr Papillon told us that he had never claimed automobile expenses. No automobile expenses of Jean-Guy or Paul Papillon had been claimed in the financial statements of Papillon & Frères”. (Transcript, pp 70 and 71). He filed a letter dated May 15, 1975 (Exhibit A-3) from Mr Mathieu of Pratte-Morrissette Inc, insurance brokers. The letter sets out the said premiums paid for 1968, 1969, 1970 and 1971; these are shown in the schedule above.

The premiums paid for the years 1961 to 1967 should be 20% lower. Mr Doré fixed them all at $470, without taking into account a reduction of 20% for each year. This rate of 20% had been supplied by Mr Mathieu of Pratte- Morrissette Inc (Transcript, pp 94, 95 and 96).

3.13 As regards the other automobile expenses (repairs and maintenance, tires, gasoline and oil), the appelants claimed additional expenses apart from the expenses already allowed by the respondent. The respondent allowed 80% of the gasoline expenses of Jean-Guy Papillon’s automobile (323,000 of 404,000 miles) and 50% of those of Paul Papillon (90,000 of 180,000 miles), for a total of $2,323.68 (see paragraph 3.06).

The additional expenses claimed in respect of the appellants’ automobiles (gas, oil and so on) amount to $47,820 (see paragraph 3.10). They break down for each year as follows:

In establishing these figures the accountant, Mr Doré, relied on the mileage by the appellants’ automobiles in the years in question (Transcript, p 74):

The average cost per mile was considered to be: $0.12 from 1961 to 1965; $0.15 from 1966 to 1970; $0.18 for 1971.

3.14 The appellants admitted that their automobiles had not been used exclusively for partnership purposes.

In the financial statements of Papillon & Frères Enr prepared by the appellants or their agent for the years under appeal, the items “Auto expenses—personal use” and Auto depreciation—personal use” appear in the “Capital Account Statement”:

The partnership financial statements were prepared by Mr Lévesque, CA (Transcript, p 191).

In his testimony, Mr Jean-Guy Papillon maintained that the item “Automobile expenses” in the partnership financial statements for the years under appeal did not include the partners’ personal automobile expenses, only those relating to partnership vehicles (two pick ups; mobile welder; Chrysler and so forth) (Transcript, 192 and 193). Mr Paul Papillon stated it was mainly Mr Jean-Guy Papillon and the accountant who concerned themselves with the financial statements (Transcript, p 267).

Mr Jean-Guy Papillon stated concerning the bookkeeping: “It was not my job to keep the books; the fellow did that and everything was fine.” (Transcript, p 212).

D. Travel and representation expenses: $29,214

3.15 When they filed the financial statements attached to their income tax returns the appellants, in computing the partnership income, had already deducted the following amounts in respect of travel, transportation and advertising:

3.16 In their notices of appeal, the appellants claimed an amount of $29,214 in respect of additional costs of travel, representation and other charges (gasoline made available by the partnership to employees as compensation for the use of their personal vehicles for partnership purposes). The amount breaks down as follows:

3.17 The appellant’s figures for each year are taken from the computations below (Exhibit A-2). The Board will include at this point only the figures for 1961 and 1971. The important point is the method of computation.

3.18 The figure of $3,540 regarded in the previous paragraph as automobile expenses for 1961 is also used for 1962, 1963 and 1964. Further, the figure of $4,855 is used for the same item in the years 1967 to 1970 (see schedule in paragraph 3.13).

3.19 Mr Doré, CA, explained the proportion of 3% in item 2 of the computation as follows:

We were unable to determine the costs of gasoline, repairs, maintenance or oil changes. That is why we based our calculation on 3% of the sales figure. (Transcript, p 146.)

Mr Doré continued:

However, since the judge has raised the matter, there are amounts in the assessment which have already been taken into account; I therefore agree that they should be deducted. If I had noticed them I would have eliminated them. (Transcript, p 147).

3.20 In the various years only the items “Automobile expenses” and “Repairs and maintenance” appear as set out below in Appendix B of the financial statements, that is, the profit and loss statement filed by the appellants.

Expenses already claimed and allowed

	Automobile	Repairs and
	expenses	maintenance
1961	$ 637.46	$1,214.61
1962	363.74	726.87
1963	455.59	721.81
1964	593.60	924.27
1965	543.53	1,886.20
1966	667.36	2,341.88
1967	560.97	1,118.38
1968	939.14	2,031.14
1969	1,660.00	1,478.00
1970	1,649.00	2,869.00
1971	1,244.00	1,825.00

3.21 Mr Doré replied as follows to a question put by counsel for the respondent:

Q. So the fact of the matter is that you do not know whether the amounts you are now claiming have already been included in Appendix B; is that what you are saying?

A. I cannot give you an answer on that—we did not do any work on that. (Transcript, p 145).

Further, Mr Doré made the following statement earlier in his evidence:

We performed no audit of the income and expenses for the years 1961 to 1971. (Transcript, p 70.)

E. Employees’ meals and taxi expenses; $10,010

3.22 The evidence showed that approximately four times each week two or three employees of the partnership Papillon et Frères Enr worked during the evening and night on vehicle repairs and that the partnership paid for their meals. Sometimes they used the pick-up to go for a meal at St-Basile or Donnacona, and sometimes they sent a taxi for that purpose.

3.23 The meals and taxi charges were paid out of the garage’s petty cash. Meals cost an average of $2 per person and the taxi cost $2.50.

3.24 The petty cash was kept by an employee called the dispatcher, whose duties were to answer the telephone, take orders and keep the petty cash. The dispatcher’s duties were in fact performed by two or three employees, since the evidence showed that a dispatcher was present in the garage 24 hours a day.

F. Mechanics’ travel expenses

3.25 The evidence also showed that employees had to travel to repair the 28 units (each unit comprises a tractor, a tank vehicle and a trailer) of the St- Basile Transport Inc fleet at the location of a breakdown. These locations were as distant as New Brunswick, Montreal, La Tuque, the North Shore, Port Cartier, New Richmond and Sherbrooke. Two men went to make the repairs, which required an absence of one, two or three days. According to one of the appellant’s witnesses (Benoît Gauthier), these breakdowns occurred between 30 and 35 times a year; another witness (Pierre Morissette) Stated that they occurred between 20 and 25 times a year.

3.26 One of the mechanics used his own automobile to make these trips. The partnership Papillon & Frères Enr refunded the automobile expenses by allowing the employee to take gasoline from the pump. Mr Pierre Morissette, who worked for the appellant as a mechanic from 1964 to 1968 and as foreman until 1971, stated that he was refunded 12 to 13 gallons of gasoline a week in this way. Normally, he and another person travelled to distant repairs. He stated that at that time a gallon of gasoline retailed for $0.50.

3.27 The other expenses incurred during these trips (hotel and meal charges) were paid by the employees from an amount given to them on leaving. These expenses amounted to about $30 a man a day.

4. Act, Case Law and Comments

4.1 Act

The main sections of the Income Tax Act, RSC 1952, c 148, concerned are sections 3, 4, paragraphs 6(1)(c), 12(1 )(a) and subsection 46(6). These will be cited if necessary.

4.2 Case Law

The parties referred to the following case law:

1. Clément Mathieu v MNR, [1978] CTC 2646; 78 DTC 1474;

2. Réjean Carneau v MNR, [1978] CTC 2440; 78 DTC 1314;

3. Hotel Cartier Inc v MNR, [1978] CTC 3029; 78 DTC 1740;

4. Guy Duchesne v MNR, [1978] CTC 2197; 78 DTC 1156;

5. Roger Mercure v MNR, [1978] CTC 2215; 78 DTC 1165.

4.3 Comments

4.3.1 In the appeal proceedings, the appellants did not dispute the amounts included in income. They confined themselves to claiming against this income expenses which they maintained had not previously been deducted when tax returns were filed annually.

If these appeals are to be allowed, the evidence which the appellants have the burden of proving must convince the Board on the following points:

1. the additional expenses claimed have not been previously claimed in the appellants’ annual income tax returns;

2. if they have not previously been claimed, these additional expenses must:

(a) have actually been incurred;

(b) have been incurred for the purpose of earning income for the partnership Papillon et Frères Enr;

(c) be reasonable.

4.3.2 Firstly, it was difficult for the appellants to establish that the additional expenses claimed had already been deducted.

The accountant, Mr Doré, CA, who determined the additional expenses to be claimed (Exhibits A-1 and A-2), stated initially that he had been unable to perform an audit of the expenses originally claimed in the years in question-1961 to 1971. Mr Doré became the appellants’ accountant only in 1973; he stated that the former system did not include any vouchers for expenses.

What therefore is the basis of Mr Doré’s assertion that the additional expenses had not previously been claimed? This assertion is based on the statements of Messrs Paul and Jean-Guy Papillon.

In his evidence, Mr Paul Papillon stated that it was mainly Jean-Guy who discussed business matters with the accountant (paragraph 3.14).

Mr Jean-Guy Papillon stated categorically that the expenses in question had not been deducted. Though the Board does not wish to question the witness’s sincerity, how can it accept this statement as accurate when it is unsupported by any secondary evidence?

On the other hand, a number of secondary factors tend to establish that most of the additional expenses claimed had already been considered by the accountant who prepared the financial statements of the partnership for each of the years in question.

4.3.2.1 The Capital Account Statement

The “Capital Account Statement” for each of the years includes the following items: “Auto expenses—personal use” and “Auto depreciation-personal use” (paragraph 3.14). In this statement, these items appear as follows in 1961 (the other years are similar):

“Appendix C”

PAPILLON & FRERE ENR

CAPITAL ACCOUNT STATEMENT

As at December 31, 1961

	Paul	Guy Guy
	Papillon	Papillon	TOTAL
Balance at December 31, 1960	$12,014.94	$11,390.32	$23,405.26
Add
Net profit	4,039.55	4,039.56	8,079.11
	$16,054.49	$15,429.88	$31,484.37

Deduct
Auto expenses—personal use	$ 106.24 $ 106.24 $ 212.48
Auto depreciation—personal use	12.54	12.54	25.08
Drawings	$ 3,389.67	$ 2,807.32	$ 6,196.99
	$ 3,508.45	$ 2,926.10	$ 6,434,55
Balance at December 31, 1961	$12,546.04	$12,503.78	$25,049.82

The first significant point to note is that the two items in question are deducted from the balance of the partners’ capital account in the same way as personal drawings. That is to say that, in accordance with the normal rules of bookkeeping, all the appellants’ automobile expenses (insurance, repairs and so on) were in principle included in the partnership profit and loss statement, since the annual profit is being adjusted through the capital account statement in order to determine the true amount of each partner’s capital.

4.3.2.2 Petty cash

Employees’ meals, taxi expenses and in all probability the advance made when employees travelled to distant repairs were paid from petty cash.

How was it possible for the accountant to ignore the petty cash?

The evidence did not show that the petty cash was not properly kept. Is it possible that an accountant who audited the partnership books for more than 10 years did not explain the importance of this item and how it should be kept? Is it possible that this accountant did not take account of the transactions it reflected? Is it possible that it slipped Mr Jean-Guy Papillon’s mind? Even if the vouchers were missing, it seems obvious that the accountant, with the dispatcher’s help, undoubtedly established the amount of each expense. There is no question that he was in a far better position to determine these expenses than was Mr Doré in 1975.

4.3.2.3 Mr Hébert, CA

Mr Jean-Guy Papillon stated that Mr Hébert, who prepared the financial statements from 1961 to 1971, was a chartered accountant. He was thus a member of a professional corporation and had good general training and specialized training in accounting. Is it possible that such a person could have overlooked such important factors as expenses paid from petty cash and the appellants’ automobile expenses, especially after already taking them into account in the capital account statement? Finally, why was Mr Hebert not called as a witness? He would have been in the best position to explain the financial statements and the absence of vouchers.

4.4 Travel expenses—admission by Mr Doré

Mr Doré admitted (paragraph 3.09) that he had not taken into account the automobile expenses and repairs and maintenance already claimed by the appellants in their tax returns and allowed by the respondent, nor had he taken any account of the other expenses of $13,753 (paragraph 3.06) also allowed by the respondent. This admission was made when Mr Doré was explaining Schedule A-2, which related to claims for travel and representation expenses (see paragraphs 3.15 to 3.12). If we compare the figures in the schedule at paragraph 3.20, it appears that for 5 of the 11 years in question, the expenses already allowed by the respondent, which Mr Doré did not take into account in computing representation expenses, are higher than those claimed. It is only necessary to compare the figure in the first column and the total of columns 2 and 3 for the years 1963, 1965, 1966, 1967 and 1968. Thus, for at least these 5 years, no deduction is possible for representation expenses. The amount of $13,753 must also be taken into account (paragraph 3.06).

Further, the Board is extremely puzzled by the method of computation in Schedule A-2. In order to determine the “Representation and other expenses” of the partnership Papillon & Frères Enr, Mr Doré begins with the total sales figure of Papillon & Frères and of St-Basile Transport Inc. Why has the sales figure of St-Basile Transport Inc been included in the computation? These are two different concerns. Even though the appellants owned all the shares in St-Basile Transport Inc, the Board has grave doubts as to the correctness of reflecting this in the schedule. Further, the evidence showed that in 1963 the appellants sold the one-third shares they owned (paragraph 3.03). It is obvious that the Board, for this reason alone, cannot accept the “Representation and other expenses” totalling $29,214.

4.5 Automobile expenses and insurance

What is Mr Doré’s evidence in support of the additional personal automobile expenses of the appellants totalling $47,820, details of which appear in paragraph 3.13? He certainly cannot be relying on vouchers: he stated that there were none. He relied on the mileage covered by each of the appellants’ vehicles and applied an average cost per mile. It was considered that about 90% of the total mileage was done for partnership purposes; this seems excessive.

Moreover, the accountant has not taken into consideration the expenses Originally claimed in the returns and allowed (paragraph 3.20) and the additional expenses allowed (paragraph 3.06).

In order to discharge the burden of proof, it would have been necessary for Mr He'bert to give evidence on this matter and submit himself fairly to a rigorous cross-examination. This last observation, together with those already made in paragraphs 4.3.2.1, 4.3.2.2 and 4.3.2.3, also applies to the other additional expenses claimed (insurance and employees’ meals).

4.6 Case Law

It is true that the case law to which the parties referred (paragraph 4.2) deals with cases in which (like the case at bar) the taxpayers had no vouchers and in which the Board found in the taxpayer’s favour. These cases, however, did not involve the problem of ascertaining whether the expenses had already been claimed. Nor did they include the factor which weighs heavily against the appellants: a professional accountant had already prepared profit and loss statements for the years in question. This factor adds an additional weight to the burden of proof which the taxpayer must already bear.

The appellants have not discharged the burden of proof in this case.

5. Conclusion

The appeals are dismissed in accordance with the above reasons for judgment.

Appeals dismissed.