Gabriel Juteau v. Minister of National Revenue, [1980] CTC 2959, 80 DTC 1841

Guy Tremblay [TRANSLATION]:—This case was heard at Montreal (Quebec) on September 17 and 18, 1970.

1. The Issue

The issue is whether the appellant, who is in the business of selling and installing Swimming pools, is entitled to have set aside the notices of assessment issued by the respondent for 1969, 1970, 1971, 1972, 1973 and 1974, which added a total income of about $147,000 for these years, involving a tax of $48,000. This tax includes penalties of about $8,500.

2. The Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from a particular section of the Income Tax Act but from several judicial decisions including the judgment of the Supreme Court of Canada in the case of Johnston v The Minister of National Revenue, [1948] CTC 195; 3 DTC 1182.

With respect to penalties, the respondent has the burden of proof pursuant to subsection 163(3) of the new Act and subsection 62(3) of the transitional rules (RAIR).

3. The Facts

3.01 From 1969 to 1974 inclusive, the appellant carried on a business for the sale, installation, maintenance and repair of swimming pools under the name of Imcarpool Enrg, then Imcarpool Inc. This business was in fact carried on by him since 1966. In 1974, the appellant was 55 years old.

3.02 The sales business operated from May 1 to August 31 of each year, although purchases were generally made during the first four months of the year. The appellant carried on this business alone with one or two students. There was strong competition in this field.

3.03 The respondent calculated the appellant’s income by the net assets method for the years 1969 to 1974 inclusive.

3.04 At the beginning of the hearing before the Board, the respondent filed en liasse (Exhibit 1-1) the notices of assessment and the T7W-C forms relating to the six years concerned. Among other things, these notices show the following figures:

Additional In-

	come	Additional tax Penalties
1969	$27,824.89	$ 8,017.09	$1,522.00
1970	28,608.68	8,168.65	1,553.08
1971	30,568.18	8,762.04	1,685.01
1972	30,568.18	9,545.53	1,909.11
1973	18,419.29	4,827.18	965.44
1974	21,946.44	5,646.67	1,129.34
	$157,935.60	$44,967.16	$8,763.98

3.05 At the beginning of the hearing, the respondent also filed en Hasse (Exhibit I-2) the opening balance sheet at December 31, 1968 and the closing balance sheet at December 31, 1974 with the calculation of capital and various schedules all of which formed the basis of the various assessments:

Mr Gabriel Juteau

Revised Statement of your Assets and Liabilities at December 31

	1968	1974
ASSETS
Current assets:
Account receivable	$ 775.20	$ -
Bank BCN no 1708	3,214.14	3,004.26
Bank BOM c/a	—	122.97
Inventory	2,000.00	—
	$ 5,989.34	$3,127.23

Investments:

Advance to Incarpool Inc.		$ -	$41,647.66
Incarpool shares		—	990.00
Term deposit BCN		—	27,000.00
Term deposit BOM		—	10,200.00
Bonds “Schedule 9”		—	60,056.00
Shares “Schedule 8’’		—	13,109.00
		$ —	$153,002.66
Net Fixed Assets:
Commercial land		$20,000.00	$ 20,000.00
Commercial building		8,000.00	8,000.00
Chrysler automobile		3,800.00	5,886.00
Dodge 1971 Camper Truck		—	3,/00.00
Ford Truck 1968		2,800.00	2,800.00
Camper Box (hand-made)		500.00	—
Residence: 34, rue des Erables		12,300.00	12,300.00
Land: 34, rue des Erables		2,000.00	2,000.00
		$49,400.00	$ 54,686.00
Total Assets		$55,389.34	$210,815.89
LIABILITIES
Mortgage on residence		$ 5,847.39	$ 3,160.11
Balance of sale price on comercial land		$12,000.00	—
Total liabilities		$17,847.39	$ 3,160.11
CAPITAL		$37,541.95	$207,655.78
Total Capital and Liabilities		$55,389.34	$210,815.89
Durette/rI
Section 41-1
Room 1047	Montreal, February 15, 1977	Schedule ‘1’

3.06 At the beginning of the hearing, the appellant put forward a number of points of disagreement (hereafter appearing under the letters A to K) with certain figures on the respondent’s opening and closing balance sheets. In fact, these points are the basis of his appeal.

(A) Cash on hand at December 31, 1968: $100,000

3.07 The appellant’s first allegation is that he had at least $100,000 in cash on hand on December 31,1968. According to the balance sheet prepared by the Minister for the same date, there was $3,214.14 in the bank.

3.08 The appellant testified that in February, 1971, he transferred $59,922 to a bank in Miami, the Miami Beach First National Bank, account no 111-5261 (Exhibit A-1). This money was said to have been transferred because of the instability created by the October, 1971 political crisis in Quebec. The account was opened on February 2,1971. The money was said to have been used as working capital for the years 1971 to 1974. From Exhibit A-1, it appears that the account was closed on January 30, 1973.

3.09 In addition, in attempting to prove that there was $100,000 in cash on December 31, 1968, he established that in November, 1970, he bought $60,056 worth of bonds, as appears from six documents issued by Merrill Lynch, Pierce, Fenner & Smith Inc, stockbrokers (Exhibit A-2). The appellant’s account number with this firm is 75240315.

3.10 The appellant stated that from January to 1969, he used the following amounts: 1) $44,756.54 (composed of 11 drafts and bills of exchange to pay suppliers which were provided to the respondent-Exhibit A-3); 2) $25,307.73 (composed of 6 documents provided to the respondent, relating to stock market transactions, Exhibit A-3); and 3) $9,683.03 (composed of 16 documents which were also to pay suppliers, Exhibit A-4); 4) finally, there were certain other expenses paid out of a BCN bank account in 1969, amounting to $8,582.93 (Exhibit A-11). All these items amount to $88,330.23.

During this entire period from 1969 to 1974, the appellant claims that he did not borrow any money. The purchases he made in the spring for the summer sales were paid for immediately in cash so as to obtain discounts.

3.11 The appellant filed as Exhibit A-16 a letter dated November 30, 1976, signed by the appellant and addressed to the respondent, to which is attached a list of documents supporting the statements in the letter.

The respondent objected to the filing of this letter. Its filing was then allowed under reserve of a later decision. The Board has decided to accept this document. First, it is relevant to the case. In addition, the content supports the appellant’s testimony. Finally, the documents attached to it relate to the statements in the letter.

3.12 The appellant claims that he loaned $49,211.97 to Imcarpool Inc at the beginning of the year, as a loan or investment in the business; the documents for this transaction were given to the respondent. This loan was repaid in the fall, which would have permitted the transfer to the Miami account on February 2, 1971.

3.13 At the beginning of 1971, the money was withdrawn from the Miami account by four drafts ($10,000, $15,000, $13,158 and $14,475.65, Exhibits A-1 and A-16). On August 16, 1971, two drafts were purchased at the Banque Canadienne: draft C 022004—$33,000 and B 803099—$6,000. The total of $39,000 was the amount loaned by the appellant, which was partly repaid by the business.

3.14 Among other things, this same money was used on May 1, 1972 to incorporate Imcarpool Inc. The initial investment was composed of an inventory transfer of $28,066.16, a $9,000 cash deposit at the Bank of Montreal which came from the working capital, and a transfer of $1,000 from the BCN to the Bank of Montreal (Exhibit A-16, schedule 3).

3.15 During the summer of 1972, the appellant loaned the company $12,900 on July 6; $13,870 on July 21 ; $3,670 on August 18; $3,505 on September 28; and $500 on October 18 (Exhibit A-16, schedule 4).

3.16 On the first balance sheet of Imcarpool Inc at December 31, 1972, there appeared under the item “receivables” the sum of $41,897.65 as “advances and loans”. On the 1973 and 1974 balance sheets, the “advances and loans” were $41,647.50.

3.17 In the schedules of Exhibit A-16, photocopies of the notes show loans in the amount of $12,000 in 1973 and $16,000 in 1974.

3.18 The profit and loss statements of the company (Exhibit I-3) show losses of $6,949.07 in 1972, $2,655.38 in 1973 and $1,615.76 in 1974.

3.19 The company went out of business on July 31, 1975. In April, the company had borrowed $24,000 from the Banque Canadienne Nationale as appears from a promissory note dated April 17,1975 signed by Imcarpool Inc. (Exhibit A-16, schedule 7). The appellant stated that the company had to borrow because in the fall of 1974, it had used its cash to buy drafts or shares and bonds (pars 3.05 and 3.26).

3.20 The appellant stated that in 1960, he may have had between $60,000 and $75,000 in cash. He had profited from stock market transactions since the end of the war. He stated that in 1966 and 1967, he had made a profit of $25,750 by selling six different groups of shares on the stock market.

(B) Opening Balance Sheet: BCN $254.06

3.21 The appellant stated that the respondent’s balance sheet, which showed a balance of $3,214.14 in the BCN savings account on December 31, 1968, was incorrect. There was only $254.06 in it. The sum of $3,214.14 was not in a bank account but in cash. The respondent admitted this point.

(C) Opening Balance Sheet: BCN c/a $16.42

3.22 The appellant stated that there was $16.42 in his current account at the BCN on December 31, 1968. The respondent admitted this point.

(D) Share and Bond Investments in 1968

3.23 On the asset side of the opening balance sheet of December 31, 1968 prepared by the respondent, nothing was shown under the category of investments. The appellant stated that on December 31, 1968, he had investments with a value of $58,926.64, as appears from the list filed as Exhibit A-5. This list reads as follows:

3.24 Part of Exhibit A-5 was a supporting document issued by Doherty Roadhouse & McCuaig, a member of the Canadian Association of Stockbrokers. This was the monthly report of transactions effected during the month of September, 1969. In this month, he bought 8,000 shares for $9,486.01 and sold 7,500 shares. No value is indicated for the shares sold. The appellant’s account number with this firm is M4-7229-0-461.

3.25 In addition, documents issued by the same firm show the following purchases on the following dates:

3.26 It appears that on December 31, 1968 (Exhibit I-2, prepared by the respondent), the appellant did not own any shares and bonds (par 3.05).

(E) Share and Bond Investments in 1974

3.27 The closing balance sheet at December 31, 1974 shows that the appellant owned $60,056 in bonds and $13,109 in shares (Exhibit 1-2, schedule 1). Details are provided in schedules 7 and 8 (par 3.05).

(F) Pick-up truck in 1968

3.28 The respondent’s opening balance sheet does not indicate any vehicle belonging to the appellant. The appellant filed as Exhibit A-7 an insurance policy rider which came into force on May 22, 1969 for a 1960 Ford pick-up truck. The appellant claimed to have paid $2,500 for it.

(G) Closing inventory 1968

3.29 On the opening balance sheet (Exhibit I-2), the respondent listed $2,000 for inventory (par 3.05). The appellant filed as Exhibit A-9 an inventory list at the end of 1968 in the amount of $36,400. The list, entitled “Schedule 3”, forms part of a letter written to the respondent which reads as follows:

3.30 The appellant also filed as Exhibit A-10 a list of property amounting to $51,821.01 with attached supporting documents, being a listing, number and cost of all items in inventory at the end of 1968. This exhibit is entitled “corrected schedule 3”. The $15,000 difference between the two lists (Exhibit A-9 and Exhibit A-10) roughly consists of an addition of $12,481.98 for “miscellaneous merchandise stock” and an increase of $1,568.44 in “material to repair vinyl swimming pools”.

(H) Imcarpool Inc shares and unrepaid advances

3.31 The appellant stated that he bought Imcarpool Inc’s shared for $990. On December 31, 1974, the company owed him the sum of $41,647.50 in advances, which he was never repaid (see par 3.16). He claimed this as a deductible loss in his 1976 income tax return.

(I) Sale of bonds

3.32 The appellant claims that bonds worth $60,056 on December 31, 1974 (Exhibit I-2, schedule 1) were sold on June 10, 1975 for the sum of $56,473.61 (Exhibit A-23). The bonds were sold through the firm of Merril Lynch, Royal securities Limited.

(J) Median or fair market value rule

3.33 During the years in question, the appellant incurred losses of $7,255.85 as a result of sales of shares. The appellant did not make the choice provided for in the Act (subsection 26(7) RAIR) to indicate whether he would apply the rule of fair market value at December 31,1971 to determine the purchase price. The assessor then applied the median rule (Subsection 26(3) RAIR).

Moreover, the appellant did not establish that the rule of fair market value would have been more advantageous for him.

(K) State of the accounting books

3.34 As Exhibit A-15, the appellant filed a letter from Les Assurances Jean D Chartrand Inc, dated June 19, 1979, to the effect that on July 9, 1971, the appellant had received the sum of $721 “to cover losses suffered in the fire of September 20, 1970” to the building at 265 Labell Blvd in Ste-Thérèse, where the appellant carried on business. The appellant stated that many documents were destroyed in this fire.

3.35 Mr Pierre Sauvé, a member of the corporation of CAs since 1971 and the appellant’s accountant since 1973, said that there was really no accounting system before he arrived. There was a purchases book and a sales register. On the individual level, there was absoultely no accounting system. It was Mr Sauvé who in August, 1973 prepared the appellant’s income tax returns and Imcarpool Inc’s financial statements for the years 1969 to 1972. He said that the appellant never told him about the existence of the $100,000 working capital in 1968, which also did not appear in the balance sheet of the business.

He never made any audit when preparing the business’ financial Statements. He said that the office equipment could have been worth from $7,000 to $8,000. He relied on the accounting registers for the sales. He was not in a position to verify whether the cash sales were deposited in the bank.

In addition, he claimed that he never had any discussions with the representatives of the Department of Revenue.

3.36 The financial statements of Imcarpool Enrg for the years 1967 to 1971 were filed as Exhibit I-4. They were signed by Pierre Sauvé, CA. Since Mr Sauve became a CA in 1971, this means that the financial statements were only prepared after that year, probably in 1973.

However, these financial statements of the business show the following net profits:

3.37 At the end of each of the years, the statement of capital shows the following result:

3.38 In particular, the statement of capital for 1969 is broken down as follows:

4. Act— Case Law—Comments

4.1 Act

The sections of the Income Tax Act involved in this case are sections 3, 4, subsections 46(6) and 56(2) of the former Act, and section 3, subsection 9(1), 152(7) and 163(2) of new Act. They will be cited, if necessary during the comments.

4.2 Case Law

The case law referred to and which the Board studied is the following:

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. Alex Markowitz v MNR, 35 Tax ABC 348; 64 DTC 397;

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

6. William Henry Phillips v MNR,3 Tax ABC 177; 51 DTC 12;

7. Claude Piette v MNR, [1979] CTC 2577; 79 DTC 425;

8. Vahan Tashdjian v MNR, 5 Tax ABC 171; 51 DTC 404;

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

10. Jack Ying v MNR, 19 Tax ABC 449; 58 DTC 430;

11. No 146 v MNR, 10 Tax ABC 99; 54 DTC 117;

12. No 230 v MNR, 12 Tax ABC 136; 55 DTC 74;

13. No 566 v MNR, 20 Tax ABC 289; 58 DTC 597;

14. No 573 v MNR, 20 Tax ABC 436; 58 DTC 706;

15. HMQ v Harold H McKay, [1975] CTC 279; 75 DTC 5176;

16. Roderick W S Johnston v MNR, [1948] CTC 195; 3 DTC 1065; 17. Jacques Delouvrier v MNR, [1978] CTC 3221; 78 DTC 1888;

18. Albert Courtois v MNR, [1979] CTC 2694; 79 DTC 506;

19. Decker Contracting Limited v MNR, [1978] CTC 838; 79 DTC 5001.

4.3 Comments

4.3.1 The main issue is to determine the amount of liquid funds the appellant had on hand at the beginning of 1969. The appellant submits that he had $100,000 (par 3.07) in liquid funds at the end of 1968 which came from stock market profits realized since the end of the war (par 3.20).

The Board did not require any evidence as to the origin of the funds at the end of 1968 (because these facts were prior to the years in issue), but only their existence.

4.3.2 On the other hand, the mere statement by a witness is not sufficient to prove the existence of these funds. In fact, the legal writers and case law have long ago established that a mere statement is not sufficient to establish the presumption of a fact or to reverse the burden of proof so as to conclusively convince a court of law (Cases: 1) Decker Contracting Ltd v MNR, (supra); 2) Albert Courtois v MNR, (supra).

According to the Traité de droit civil du Québec, Volume 9, paragraph 591, by André Nadeau and Léo Ducharme, the presumption of a fact must be serious (that is, supported by a serious fact), precise (that is, leading directly and necessarily to the proof of the unknown fact) and consistent (that is, not conflicting with other points of evidence but in accordance with all of the probabilities or the normal circumstances of the matter at issue).

A study of the case law referred to in the two cases cited above shows once again that the civil law and the common law are in agreement on the basic principles.

4.3.3 Are these three qualities which are required to provide a valid presumption of fact met in the present case? The appellant tried to show that from January to June, 1970, he used about $88,000 (par 3.10). Although the Board is not prepared to fully accept this evidence, it is true that the appellant provided many documents to the respondent (for $44,756.54 and $25,307.73, although the Board did not see them) and to the Board ($9,683.03 and $8,582.93) which confirm that the appellant had liquid funds at the beginning of 1969. The appellant provided a photocopy of cheque stubs and receipts from the stockbrokers Doherty Roadhouse & McCuaig as evidence of $8,582.93. However, by adding the amount of all these documents, the Board arrives at more than $18,000. Is this simply an error of calculation? If not, why has $10,000 been omitted from it? As these documents are not too precise as to their source and use, the Board cannot accept this evidence to show that these same amounts are not already included in the other amounts described above.

It is difficult for the Board to reject the documents that the appellant provided to the respondent but which the Board was not given the opportunity to see and study. On the contrary, they should have been filed by the respondent. The Board is therefore obliged to accept them. In addition, the Board has studied Exhibit A-4 relating to the accounts amounting to $9,683.03.

The Board concludes that there are enough serious and precise facts to accept the existence of a working capital of $79,747.30 ($44,756.54 + $25,307.73 + $9,683.03) at December 31, 1968.

4.3.4 One factor confirms, albeit indirectly, the possibility of the existence of an amount in cash at the end of 1968. This is the fact that the appellant has accounts at the brokerage firms of Merrill Lynch, Pierce, Fenner & smith Inc (par 3.09) and Doherty Roadhouse & McCuaig (par 3.24). He receives monthly statements of his purchases and sales from these firms (par 3.25). From this fact and the shares and bonds in existence in 1974, (pars 3.26 and 3.27), it appears that the appellant was familiar with the stock market. This confirms the probability that he could have accumulated a certain amount of cash before 1969 by playing the stock market.

Finally, the appellant stated that he did not borrow any money in the period from 1969 to 1974. This evidence was uncontradicted. The absence of a loan for business purposes also confirms the probability of the existence of an amount in cash at the end of 1968.

These points show that the presumption has the third quality of consistency. The fact that the accountant Sauvé did not hear of this amount in 1968 (par 3.35) does not validly contradict its existence. The accountant was then preparing the balance sheet of the business and not the personal balance sheet of the appellant.

B. Inventory at December 31, 1968

4.3.5 The Board is confused on the difference between the inventory of $2,000 at December 31, 1968 (Exhibit I-2) claimed by the respondent (pars 3.05 and 3.29) and the inventory of $36,400 claimed by the appellant on the same date (par 3.29), later corrected to $51,821.01.

The respondent probably took the inventory as declared by the appellant in the statement of revenue and expenses (Exhibit I-4) for 1968, that is, the inventory of $2,000 described in Exhibit I-4 as “closing inventory’’ and in Exhibits A-9 and A-10 as “Swimming pools and accessories transferred to Im- Carpool Enrg.”

In the first place, the Board does not accept the inventory of $51,821.01 (Exhibit A-10). No valid explanation has been given to increase the preceding exhibit (Exhibit A-9) in general and the “miscellaneous merchandise stock” of $12,481.98 in particular.

Although the inventory of $36,400 (Exhibit A-9) was not contradicted by the respondent, the Board cannot fully accept it because the evidence did not indicate the date on which this inventory was taken. In any event, it does not appear to have been taken at the beginning of 1969 but rather 4 or 5 years later. How then could it have been validly taken?

4.3.6 The Board believes that at the end of 1968, the moveable property of the business or office equipment could have been worth $5,500, because it was valued at $7,000 to $8,000 in 1974 by the accountant Sauvé (par 3.55). However, it is very likely that the value of the balance was in excess of $2,000, since the business had been in existence since 1966. However, considering the weakness of the evidence, the Board cannot grant more than $7,500 and even that appears generous.

The inventory at the end of 1968 would therefore amount to $15,000 ($2,000 + $5,500 + $7,500). This inventory problem would not have existed if the appellant had filed his returns on time and kept an adequate accounting system.

C. Investment in shares and bonds in 1968

4.3.7 The evidence (pars 3.23 to 3.26) on the existence of shares and bonds at December 31,1968 is part of the evidence on cash, because the appellant referred to stock market transactions after the war which were taken into account by the Board to confirm the existence of cash. The appellant sold these shares and bonds to obtain cash to finance his inventory; later on, with the sales from his business, he bought shares and bonds.

Although in the assets of a balance sheet the item “cash” is different from “investment”, the evidence before the Board indicates that the two items are merged into one under the item “liquid assets”. They may perhaps be considered separately but the total in this case must not exceed $79,747.30, the amount fixed as liquid assets (par 4.3.3).

D. Unrepaid loans to Imcarpool Inc: a business loss

4.3.8 In theory, it is unnecessary to settle this item in this case, because the $41,647.50 loss (par 3.31) was claimed in his 1976 tax return, which is not being appealed at this time before the Board.

However, as an “obiter dictum”, the Board is of the view that the evidence is not strong enough to reverse the burden of proof. At a given point in his testimony, the appellant claimed that the money he loaned to his business in the spring to buy inventory was repaid in the fall. He also stated that in the fall of 1974, he took all his cash to buy shares and bonds with the result that Imcarpool Inc had to borrow $24,000 in the spring of 1975 (par 3.19) because it had no more cash. Did he take out this cash from the company in the fall of 1974, as was his practice, to make his investment?

If he “took out this cash”, didn’t he repay his own debt? Perhaps the appellant is correct but the evidence is not too clear.

In addition, the accountant Sauvé testified that he did not perform any audit and therefore the Board has doubts about their correctness, including the loan.

E. The median rule (par 3.33)

4.3.9 As the appellant did not make his choice at the time fixed by the Act (26(7) RAIR), namely in his income tax return following the sale of shares, he may no longer make this choice. The rule of the median must then apply and this is what the respondent used in making the assessment.

F. Pick-up truck (par 3.28)

4.3.10 The appellant claims that at the beginning of 1969, he owned a 1960 “pick-up” truck. He said that he bought it for $2,500. The evidence is not clear on the date of purchase. The Board is doubtful that a 1960 pick-up could have been purchased for $2,500 in 1969. It is more likely that it was purchased in 1960 for $2,500. What then was its value on the December 31, 1968 balance sheet? The evidence is not exact enough to permit the admission of this fact.

G. Penalties

4.3.11 The whole problem is largely due to the absence of an accounting system. The 1971 fire which destroyed some documents did not destroy the accounting books because there were none.

The appellant has not shown or even stated that he had an accounting system. For an experienced businessman like the appellant, the absence of an accounting system constitutes gross negligence within the meaning of subsections 56(2) of the former Act and 163(2) of the new Act. Penalties must be imposed, but which of course take account of the admissions and conclusions of the Board mentioned above.

5. Conclusion

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

Appeal allowed in part.