Louis Farovitch v. Minister of National Revenue, [1980] CTC 2594, 80 DTC 1494

Guy Tremblay:— This case was heard in Montreal, Quebec, on March 21 and May 14, 1979.

1. The Point at Issue

The point is whether the appellant, a scrap metal dealer, is correct in appealing the respondent’s assessments by which:

(a) it is included in his 1972 income $11,643, in his 1973 income $32,686 in his 1974 income $34,182; and,

(b) penalties of $506.97, $2,046.80 and $2,282.92 for corresponding taxation years 1972, 1973 and 1974.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several 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.

According to this judgment (Johnston), and the respondent’s assumptions of fact on which the appeal is based the assessments are correct unless the appellant contradicts them.

The respondent in subparagraphs a to c of paragraph 3 in his reply to the notice of appeal describes those assumptions:

(a) during the relevant period, the appellant was a scrap metal dealer;

(b) the appellant, knowingly, or under circumstances amounting to gross negligence, omitted to report the following sales:

1972	$11,643
1973	$32,686
1974	$34,182

(c) the respondent duly added those sales to the declared income of the appellant;

2.02 Concerning the penalties imposed in accordance with subsection 163(2) the burden of proof is on the respondent’s shoulders according to subsection 163(3) of the Act. These sections are quoted in paragraph 4.01.

3. Facts According to the Evidence

3.01 During the taxation years 1972, 1973 and 1974, the appellant was Carrying on a scrap metal business under the registered name of L & F Metals Co on 4710 Drolet Street, Montreal. He has been dealing in this business for 24 years.

3.02 In the course of carrying on such business he made sales to Capital Metals Industries Quebec Ltd and WI Sandys Inc, both of Montreal.

3.03 The appellant contends that during this 3-year period he received from the above two customers the approximate total amounts which were not recorded in his accounting books:

Moreover, the appellant contends that the said amounts received and not recorded were used to pay debts which were also not recorded.

3.04 The respondent assessed the appellant on the basis that the unrecorded sales for the three years were as follows:

3.05 The respondent filed a list of 37 non-recorded sales (Exhibit R-1, Tab V, schedule I) made from February 28, 1974 to December 19, 1974 to Capital Metals Industries Quebec Ltd (CMI). Those sales totalled $27,851.10.

3.06 The respondent also filed a list of non-recorded sales made to and paid in cash by WI Sandys Inc in 1972 (19 sales) totalling $11,842.60; in 1973 (62 sales) totalling $32,813.75; and in 1974 (15 sales) totalling $7,012.45 (Exhibit R-1, Tab V, Schedule II).

3.07 The respondent also filed a list of sales made to WI Sandys Inc, and paid by cheques in 1972 (11 sales) totalling $1,678; in 1973 (13 sales) totalling $5,089; and 1974 (2 sales) totalling $1,307 (Exhibit R-1, Tab V, Schedule III).

3.08 Taking into account that the declared sales to WI Sandys Inc were in 1972 $1,878; in 1973 $5,217; and in 1974 $1,988: and taking into account the figures of the former two paragraphs, the undeclared sales made to WI Sandys included in the appellant’s income can be summarized as follows:

3.09 The appellant testified that in the case of WI Sandys Inc, the sales could not be more than $250 to $300 a month, and “Some months I never delivered anything.” (SN p 15). At page 36 of the SN, he said: “I delivered for $300 and $400 and $500 and $800, and there is months that I delivered nothing.” The payments were done “Sometimes by cheque and sometimes by cash” (SN p 15). He said he “Never signed anything.” when he received the money (SN p 18).

3.10 Concerning CMI, the appellant denied the responent’s amount of $27,851 and said that, roughly, he received $6,000 to $7,000 in cash.” (SN p 16)

3.11 The appellant said he did not remember if he signed when he received the cash; “I don’t remember. Maybe.” (SN p 18). He also answered “Maybe.” to the question: “Could your driver have signed for it possibly?” (SN p 18). “I send my driver with the merchandise. He comes back sometimes with a cheque or sometimes comes back with cash.” (SN p 19).

3.12 When the appellant (or his driver) went to a purchaser, the receiver “used to weigh in the merchandise and give me a slip and you would go to the office with it” would get paid, and “sometimes by cash and sometimes by cheque.” (SN p 25). Sometimes the payer decided the way to pay, sometimes it was decided by the appellant. In the latter case, it depended on whether the appellant needed cash to buy other scrap metal or a cheque to deposit in the bank (SN p 26).

3.13 According to the appellant, the purchaser never issued a purchase slip (SN p 27):

Q. Did they issue a certain document to attest the transaction?

A. (Shaking his head.) Nothing. (SN p 28)

3.14 According to Mr Ernest Lutterman, one of the main shareholders of WI Sandys Inc which has been in the scrap metal business since 1904, his company is very important. It supplies Metal and Alloys Montreal; Metal and Alloys Toronto; Tinelli Canada, Toronto; Intermetco, Hamilton and Toronto—80% of its business in Canada.

3.15 He said that before 1975, his company could buy scrap metal in cash every day from $6,000 to $10,000. This totalled about two or three million every year.

3.16 Mr Lutterman testified that his company always issued a purchase Slip to their customer-vendors. They have about 100 to 150 customervendors.

3.17 He testified that he has known Mr Farovitch for about 25 years.

3.18 Mr Lutterman identified purchase invoices issued by his company and paid in cash to the appellant in 1972 for $11,842.60 (Exhibit R-2); in 1973 for $32,813.75 (Exhibit R-3); and in 1974 for $7,012.45 (Exhibit R-4). The purchase invoices, however, were not signed by the appellant or his truck driver. It was not the practice before 1975, the year when the Department of Revenue made an investigation. The invoices were not numbered. One amount of $246 does not refer to the appellant.

3.19 Mr Lutterman also identified series of cheques issued by his company to the order of the appellant in 1972 for $1,678 (Exhibit R-5); in 1973 for $5,089 (Exhibit R-6); and in 1974 for $1,307 (Exhibit R-7).

According to Mr Lutterman there were three persons who worked for the company during the relevant years 1972, 1973 and 1974; Mr Landy, Miss Juliette Lessard and himself. He said they were never short-changed in petty cash.

3.20 In her testimony, Miss Lessard confirmed the testimony of Mr Lutterman concerning the purchase invoices issued by WI Sandys Inc. Among the invoices filed as exhibits, she identified those prepared by her: 2 of 19 in 1972, 41 of 62 in 1973, and 2 of 9 in 1974.

3.21 Miss Lessard explained that when she paid cash to the appellant’s driver, she gave him the money in an envelope. A few minutes later the appellant used to take information about the amount of money she had given to the driver. She said first that when it was the driver, she required the signature, but not when she gave the money to the appellant himself. However, she said that sometimes he wanted to sign the invoice, sometimes not: “They were always rushing.’’ In fact, on the invoices filed as exhibits, there was no signature of the driver.

3.22 Another witness, Mr Michel Nichols, investigator for the Department of Revenue since 1969, explained that he made an investigation in 1974 and 1975 of about 15 companies whose business was scrap metals, and among others Capital Metals Industries Quebec Ltd.

3.23 He noticed that many cheques were issued by Capital Metals Industries Quebec Ltd to the order of cash (Exhibit R-1, Tab U). Receiving slips connected with that cheque referred to a Mr L Peters. According to his knowledge, there was no person of that name in the scrap metal business. On one of the receiving slips, the name of L Peters was crossed out and the name of L & F Metals Co was written with the address 4710 Drolet St (Exhibit R-8).

3.24 Moreover, it was noted that on the other invoices near the name of “L Peters” was a truck licence number. One was F253-771 and the other was F314-353 (Exhibit R-9).

3.25 Mr Denis Beaudet, investigator for the Department of Revenue, testified that in investigating Capital Metals Industries Quebec Ltd, they picked up the cheques, weigh bills, receiving slips which referred to L Peters. In fact, each cheque to the order of cash, was connected with a certain number of receiving slips, many having the name of L Peters with an amount. Sometimes they found some addresses with the name of L Peters: 105 Wellington and 4120 Rachel. These addresses, however, did not exist. They also found a weigh bill in the name of L Peters which corresponded with the receiving slip in the name of L & F Metals Co.

3.26 Another witness, Mr Gilles Bouchard, filed as exhibit R-10, documents issued by the Department of Vehicles & Automobiles to the effect that immatriculation vehicle numbers F314-353 and F253-771 were registered in the name of L & F Metals Co.

4. Law—Precedent Cases—Comments

4.1 Law

The main sections of the new Income Tax Act involved in the present case are section 9, paragraph 18(1)(a) and subsections 163(2) and (3). Subsections 163(2) and (3) read as follows:

163.(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.

163.(3) Where, in any appeal under the 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 Precedent Cases

The respondent’s counsel, to base his contention, referred to the following cases:

1. George Basha v MNR, 31 Tax ABC 417; 63 DTC 375;

2. Bruce A Carey v MNR, 17 Tax ABC 97; 57 DTC 215;

3. Vincenzo Curcio v MNR, [1978] CTC 2076; 78 DTC 1097;

4. Jacques Delouvrierv MNR, [1978] CTC 3221; 78 DTC 1888;

5. Joseph Philliponi Jr v MNR, [1951] CTC 255; 51 DTC 528;

6. Claude Piette, [1979] CTC 2577: 79 DTC 425;

7 . MNR v William S Walker &WS Walker v MNR, [1951] CTC 334; 52 DTC 1001.

4.3 Comments

4.3.1 The appellant’s testimony was contradicted on the points that the purchaser never issued a purchase or receiving slip (para 3.13). The testimonies of Mr Lutterman (para 3.16) and Miss Lessard (para 3.20) in the case of WI Sandys Inc, and the testimonies of Messrs Nichols and Beaudet in the case of Capital Metals Industries Quebec Ltd are clear.

4.3.2 Moreover, the testimony of the appellant to the effect that he made sales to WI Sandys Inc for about $250 to $300 per month means $3,000 to $3,600 per year, and is an admission of $9,000 to $10,800 for the three relevant years, and not only $6,000 to $7,000.

4.3.3 The receiving slips filed as exhibits R-2, R-3, and R-4 and the cheques as exhibits R-5, R-6 and R-7 actually recognized by Mr Lutterman and Miss Lessard weigh the greater part of the evidence in favor of the respondent’s thesis.

Capital Metals Industries Quebec Ltd

4.3.4 All the amounts appearing in the Exhibit R-1, Schedule I are part of the cheques made to the order of cash referred to in the said exhibit. The same amounts were on receiving slips or weigh bills in the names of L & F Metals Co, L & F or L Peters.

The Board is satisfied with the evidence given by the employees of the respondent to the effect that L Peters is the appellant (para 3.22 to 3.26).

The appellant has not reversed the burden of proof by his gratuitous assertion (not confirmed by any document) to the effect that the unreported income was only $6,000 to $7,000 in each case of WI Sandys Inc and Capital Metals Industries Quebec Ltd.

Moreover, the evidence given by the employees of the respondent confirms that the reassessments are correct.

4.3.5 Penalties

The negligence in the appellant’s accounting system is not including the sales described above, and not keeping vouchers is sufficient gross negligence to base the penalty imposed by the respondent.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.