Wellington Taylor v. Minister of National Revenue, [1980] CTC 3003, 81 DTC 3

M J Bonner:—The appellant appeals from assessments of income tax and penalties for the 1974 and 1975 taxation years.

During the years in question the appellant carried on the business of a dealer in scrap.

The assessment, objection and post-objection events are described in paragraphs 9 to 12 of the notice of appeal as follows:

9. By notice of re-assessment dated the 9th day of September, 1977, the Minister of National Revenue re-assessed the appellant by assessing the appellant’s income in manner so as to include alleged unreported revenue in the amount of $29,584.71, and further disallowed supplies expenses in the amount of $9,642.18, and additionally, disallowed truck expenses and interest expenses in the amount of $674.73 and $1,059.10, respectively. The net result was to increase the appellant’s income in the 1974 taxation year by $40,960.63.

The Minister of National Revenue further assessed penalties pursuant to the provisions of subsection 2 of section 163 of the Income Tax Act (Canada) 1972 (as amended).

10. By notice of re-assessment dated the 9th day of September, 1977, the Minister of National Revenue re-assessed the taxpayer’s income for the taxation year 1975 by including in the appellant’s income for the year alleged unreported revenue in the amount of $20,293.65 and further disallowed the appellant’s deductions in respect of supplies expenses in the amount of $2,212.66, truck expenses in the amount of $2,160.35, and interest expenses in the amount of $888.49 resulting in an increase in the appellant’s income for the taxation year 1975 in an amount of $25,555.15. The Minister of National Revenue further included in his notice of reassessment a penalty assessed pursuant to the provisions of subsection 2 of section 163 of the Income Tax Act (Canada) 1972 (as amended).

11. By notices of objection dated the 18th day of October, 1977, the appellant gave notice that he objected to the Minister’s assessments for the reasons therein stated.

12. By notification of confirmation by the Minister dated the 30th day of October, 1978, the Minister of National Revenue on the one hand, confirmed his assessment in respect of the taxation year 1974 as previously issued and the other hand, on the same date and by the same mailing, enclosed a further notice of reassessment dated October 30, 1978 by which the Minister of National Revenue reduced the amount of the alleged unreported revenue to the appellant for taxation year 1974 by the amount of $2,674.67 but disallowed the appellant’s claim in respect of personal exemptions by the sum of $1,180. No explanation as to the reason, basis or cause of the adjustments to the assessments or the notice of reassessment dated October 30, 1978 was further given to the appellant.

Paragraphs 9, 10 and 11 were admitted by the respondent. As to paragraph 12, paragraph 6 of the Reply to the notice of appeal read as follows:

6. In reply to paragraph 12 of the appellant’s notice of appeal he admits a notice of reassessment and a notice of confirmation, both dated October 30, 1978 with respect to the appellant’s 1974 taxation year were mailed to the appellant but says the said notices speak for themselves and otherwise does not admit the said paragraph.

The copies of documents transmitted by the Minister to this Board pursuant to subsection 170(2) of the Income Tax Act do not include a copy of the confirmation for 1974. On the basis of the allegations and admissions in the pleadings, the Minister appears to have been a little uncertain as to what action to take in respect to the 1974 objection but, for the reasons which follow, nothing turns in this case upon such uncertainty.

The notice of appeal challenges the additions to declared income, the disallowances of claimed expenses and the consequent penalties as arbitrary and without basis. Reference is made in the notice of appeal to subsection 163(3) of the Income Tax Act, followed by the submission that it is incumbent on the Respondent to establish the facts which justify the assessments.

The Minister proceeded first. He called only one witness, William Rutgers, a field auditor with the Department of National Revenue. Mr Rutgers had conducted an “audit” of the appellant’s affairs for 1974 and 1975.

Mr Rutgers found that the appellant’s records of sales were incomplete. For 1974 they consisted of a single sheet on which total sales for each month were set down. The total shown on that sheet matched the total sales entered in the appellant’s tax return. For 1975 records of sales consisted of a scribbler listing sales, their dates, amounts and name of customer. The total of the sales shown in that book was $83,730.73. Sales reported in the appellant’s return were $73,622.07. According to Mr Rutgers that book was prepared not by the appellant, but by some unnamed member of the appellant’s family. The records or sources used in the preparation of that book were not described. It appears that it is not a record made contemporaneously with the events recorded but, rather, is some sort of reconstruction. Mr Rutgers attempted to determine the accuracy of reported sales for both years by reference to the records of other scrap dealers who purchased from the appellant.

As to expenses, Mr Rutgers found very incomplete records for 1974 and some records and some source documents for 1975. In arriving at figures used in assessing tax for 1975, Mr Rutgers calculated expenses by allowing all expenses of which he found a written record, save for duplications which amounted to $2,000, but were otherwise unidentified, and the recorded expense of a truck purchase. He regarded that truck as a capital asset. There was no evidence as to whether the truck was bought for use as a truck, or whether it was bought for its scrap content. His evidence was that the state of 1974 records was such that he was forced to resort to an indirect method of determining expenses. He computed 1974 expenses on the basis that they formed the same proportion of revised 1974 sales that the expenses allowed for 1975 formed of revised 1975 sales.

The appellant did not testify, nor did he call anyone else to give evidence.

First a word about the evidence. Subsection 9(2) of the Tax Review Board Act provides that this Board .. is not bound by any legal or technical rules of evidence in conducting a hearing . . That provision does not, as I read it, make the rules of evidence inapplicable. Rather, it operates to make departure from such rules permissible in some circumstances. It is undesirable, in my view, to attempt to define all circumstances in which the ordinary rules of evidence should not be followed. It is sufficient to say that such departure is unjustified in any case in which the result would be unfairness to either party.

In this case considerations of fairness operated to exclude the evidence tendered by the respondent in an attempt to establish that the appellant, in his returns, understated revenues and overstated expenses. Mr Rutgers possessed no direct knowledge either of what sales had, in fact, been made or of what expenses had, in fact, been incurred. He did have slips, documents and information taken from the records of other scrap dealers pertaining to sales allegedly made by the appellant to them. Such papers, coupled with what Mr Rutgers had gleaned from his examination of the records of other scrap dealers, were the evidence tendered by the respondent. Counsel for the respondent was not prepared to suggest that any such papers were admissible under the “business records” provisions of section 30 of the Canada Evidence Act, nor that the rest of the evidence was admissible under any other exception to the hearsay rule. I ruled it all inadmissible because it seemed to be the essence of unfairness to attempt to establish the fact of the disputed sales through the mouth of a person whose answer to all questions on cross-examination would, perforce, be “I don’t know”. In the absence of any notice to the appellant of the respondent’s intention to proceed in reliance on section 30 of the Canada Evidence Act the appellant was not in a position to prepare to meet that part of the “evidence” tendered.

Thus, the evidence was insufficient to establish that the appellant’s sales for 1974 and 1975 were anything other than the reported amounts. The supposed record of 1975 sales did not assist the respondent because it was not shown to be, in any way, an admission made by or on behalf of the appellant. Equally, Mr Rutgers was not in a position to say that the expenses claimed by the appellant in computing income were inflated. He simply did not know what they were. He knew only what was recorded or shown by such receipts and such written records as he was able to find.

Subsection 163(2) of the Act delineates the factual elements which must exist if a penalty is to be imposed lawfully. In this case the respondent’s position that penalties are exigible involves the assertion that tax payable in each year exceeds the amount which would have been payable on the basis of information provided by the appellant in his returns, the excess resulting from understated revenues and overstated expenses. Such understatements and overstatements are constituent elements of liability for a penalty. The appellant cannot be liable to a penalty under subsection 163(2) if he has correctly declared his income.

Subsection 163(3) provides:

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.

By virtue of that provision I cannot assume that the findings or assumptions of fact made by the Minister on assessment as to the quantum of revenues and expenses are factually correct. Such a prima facie assumption is made in an appeal where the sole issue is liability for tax. In this regard Duff, J, in delivering the reasons for judgment of the Supreme Court of Canada in Anderson Logging Company v The King, [1917-27] CTC 198; 52 DTC 1209 (aff’d [1917-27] CTC 210; 52 DTC 1215), said at 202 [1211]:

But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must show that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered;

Reference may also be made to the reasons for judgment of Rand, J, in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182 at 202 [1183], where his Lord- ship said:

Notwithstanding that it is spoken of in subsection 63(2) as an action ready for trial or hearing, the proceeding is an appeal from the taxation; and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.

The common law rule as to burden or onus of proof as laid down in those cases is displaced in a case where a penalty has been levied under section 163. The effect of the plain words of subsection 163(3) is to remove from the taxpayer and place on the Minister the burden of proof of those facts which are constituent elements of the penalty levied and in issue in an appeal.

Although the evidence here is quite clear that the appellant kept hopelessly inadequate records, that fact alone is insufficient warrant for the penalties imposed. There was simply no admissible evidence tendered on which I could reach any conclusion as to what the appellant’s revenues and expenses for the years in question were in fact. In consequence, I cannot reach any conclusion for either year as to what was the tax payable by the appellant. The Minister has failed to discharge the burden imposed on him by subsection 163(3) of the Act and the penalties, at least, must fall.

The respondent’s counsel argued that any failure to discharge the burden imposed on the Minister by subsection 163(3) can entitle the appellant to relief only from penalties.

The result for which the respondent contends must, as I see it, flow from either:

(a) a limitation on the consequences of a failure to discharge the burden, or

(b) a limitation on the extent of the burden, or

(c) placement of the burden in relation to one single issue of fact on the appellant as regards liability for tax and on the respondent as regards liability for penalty.

I find nothing in the plain words of subsection 163(3) which justifies reaching any of those conclusions.

The words .. assessment of the penalty ...” in subsection 163(3) would, said counsel for the respondent, be surplusage if that subsection were construed as entitling the appellant to relief against tax in a case such as this. In my view those words do not serve, in any way, to limit the consequences of a failure to discharge the burden. They simply form part of a larger phrase .. the facts justifying the assessment of the penalty . .

which identifies those facts in respect of which the burden is placed on the Minister. The subsection makes no explicit reference to the consequences of a failure to discharge the burden. Parliament can only have intended that the ordinary result of the subsection 163(3) placement of the burden must flow. If a proposition of fact in issue in litigation cannot, on all the evidence, be found to have been established, then the result is that the party who bears the onus in respect of that issue must face judgment on the basis that the fact which he alleges has not been established. In this case, on the evidence, I cannot find either the revenues or the expenses were what the respondent alleged they were.

I have dealt with the question of the extent of the burden already. The words of subsection 163(3) are, I think, inconsistent with the assertion that Parliament intended to limit the burden placed on the Minister to some, but not all, of the facts which subsection 163(2) makes necessary to the lawful imposition of a penalty. It cannot, I think, be said that subsection 163(3) relates only to those facts which tend to show the existence of knowledge or circumstances amounting to gross negligence. The burden which is the subject of subsection 163(3) is, according to the plain words employed in the Act, the burden of establishing the facts justifying the assessment of the penalty and not just some of those facts.

I can find nothing in the words of subsection 163(3) which suggests that in an appeal from an assessment of tax and penalty the burden on any one single issue of fact was intended to rest simultaneously on both parties with the result that the fact can, in some mysterious way, be found to exist for purposes of liability to tax, but not to exist for purposes of liability to penalty. A suggestion that such is the case seems to involve the assertion that there is really more than one appeal from an assessment of tax and penalty where the taxpayer challenges both. I cannot find anything in the words of the subsection which permits such a construction.

I might add that I do not regard this decision as inconsistent with the decision of this Board in Isadore Waxstein v MNR, [1980] CTC 2398; 80 DTC 1348. That case simply decided that increases to declared income and consequent penalties there under appeal were not, having regard to the evidence, justified and in consequence the additions and penalties fell. The statement at 2401 [1351], .. the onus is on the appellant to show the assessments of ‘income’ are incorrect”, is not essential to the result there reached. The Board was not there called upon to decide what would have happened had the appellant not given evidence.

In the result the appeals are allowed and the assessments are referred back to the respondent for reconsideration and reassessment on the basis that the appellant is not liable to tax on the additions to declared income in issue in the appeals and is not liable to penalties assessed thereon.

Appeal allowed.