Couture v. R., [1997] 2 CTC 2390

Lamarre Proulx T.C.J.:

The appellant is appealing the assessments by the Minister of National Revenue (the “Minister”) for the 1988 and 1989 taxation years.

At the start of the hearing, counsel for the appellant informed the Court that the appellant discontinued his appeal for 1989. The appeal is therefore dismissed for that year.

As to 1988, the point at issue was whether the Minister was correct in including an amount of $57,000 in the appellant’s income as a benefit received from 104509 Canada Ltée (“104509”) under subsection 15(1) of the Income Tax Act (the “Act”).

Gilles Audet, a chartered accountant with the firm Mallette et Maheux, testified for the appellant. He has been the appellant’s accountant since 1992.

On April 22, 1988, 104509, a corporation of which the appellant is the principal shareholder, sold all the shares it held in the capital stock of Pourvoirie des Laurentides Ltée. The price consisted in an amount of $86,813 and in a significant sum in repayment of loans made to the outfitting operation by 104509 and by the appellant. What is at issue here are not the reimbursements of the loans but a part of the payment of $86,813 for the aforementioned shares in the amount of $57,820. The contract of sale of the shares is reproduced in part in Exhibit 1-1, tab 6.

On April 22, 1988, the notary who prepared the contract delivered the sum of $57,820 to 104509 in payment of its shares. On the same day, 104509 made a cheque to the appellant in the amount of $57,000 (Exhibit A-l and Exhibit 1-1, tab 7). This amount of $57,000 was entered in the director’s advance account as a repayment of those advances to the director. This would have been correct. However, and this is the core of the issue, the same amount of $57,820 was entered again in the same director’s advance account, without the appellant lending again that sum to 104509. The same amount was entered twice, once as a repayment and another time as a loan. As a result, in the director’s advance account, there was an amount of $57,000 that remained entered, whereas it had not been lent. Furthermore, the capital gain made by 104509 on the sale of the shares was not declared by it.

In 1992, the Minister’s officers investigated and discovered this false entry. The witness Mr. Audet, an accountant since 1992, said that the second entry of the amount received from the sale of the shares in the advance account of a shareholder as a loan was a mistake made by the accountant of the time. The director’s advance account, he said, would have now been rectified. The appellant included in his income in 1992 an amount of $12,443.30 pursuant to subsection 15(2) of the Act. He repaid that amount in 1993 and claimed a deduction in respect of it, possibly under paragraph 20(1 )(j) of the Act (Exhibit A-5). Furthermore, Mr. Audet said that he had also calculated and included the capital gain and 104509 had been assessed accordingly.

Counsel for the appellant argued that the amount of $57,000 was actually the repayment of advances made by the shareholder and that the second entry in the amount of $57,820 was an error by the accountant and that that error had been rectified. It had been removed from the advance account of a shareholder and 104509 had included the capital gain in computing its income. He referred to the decision by this Court in Gannon v. Minister of National Revenue, [1988] 1 C.T.C. 2422, 88 D.T.C. 1282 (T.C.C.) and cited the following passage, at page 2423 (D.T.C. 1283):

It is difficult to conceive how a simple bookkeeping error whether of commission or of omission can be a foundation for taxation. Generally speaking taxation rests on what happened and not on an oversight in making a financial record of what happened.

Counsel for the respondent contended that there was no evidence that what was done was not done wilfully. Neither the accountant, who allegedly made the erroneous entry nor the appellant testified. He referred to the decision by this Court in Enns v. Minister of National Revenue, [1987] 1 C.T.C. 2256, 87 D.T.C. 208 (T.C.C.), and to its reference to the decision by the Supreme Court of Canada in Lévesque v. Comeau, [1970] S.C.R. 1010, 16 D.L.R. (3d) 425. Pigeon J. made the following remarks, at pages 1012-13 (D.L.R. 432) of that decision:

She alone could bring before the Court the evidence of those facts and she failed to do it. In my opinion, the rule to be applied in such circumstances is that a Court must presume that such evidence would adversely affect her case.

Counsel for the respondent thus contended that the witnesses of the facts had not testified because they could not have corroborated the statements made by the accountant in charge after the investigation by the Minister’s officers. The shares held by 104509 were sold in 1988 and the income tax return for that year showed nothing in respect of that disposition. What was done could only have been done wilfully in the hope that the Minister’s officers would see nothing to it.

Counsel for the respondent also referred to the Federal Court of Appeal decision in RV. Neudorf, [1975] C.T.C. 192, 75 D.T.C. 5213, more particularly to the following passage, in order to show that subsection 15(1) of the Act applies on the basis of the presentation of the facts made at the time of the income tax return, not on the basis of a corrected presentation in the case of an investigation by the Minister at pages 196-97:

Defendant’s counsel seeks to distinguish the Saint-Germain case (supra), because of the existence of the lease, dated April 2, 1971 and marked as Schedule “B” to the Agreed Statement. The lease was entered into in 1971 after the Minister had re-assessed the defendant under section 8(1 )(c). It is an ex post facto arrangement of the kind referred to by Chief Justice Jackett in the Rose case (supra). It is, in my view, a self-serving document, prepared in an attempt to escape the consequences of taxation under section 8(1 )(c) and I am not prepared to give it the retrospective effect which it purports to have.

He also referred to a decision by this Court in Groeneveld v. Minister of National Revenue, [1990] 1 C.T.C. 2314, 90 D.T.C. 1211 (T.C.C.), and to the following passage at page 2317:

If not for the Respondent’s auditors, the Appellant would have been free to take the $40,000.00 out of Dunbow as a loan repayment and escape any tax liability. “After the fact” (hearing transcript page 90) attempts by the Appellant’s accountants to adjust the records to reflect a more favourable outcome, are of no help to the Appellant. The Court is not to determine the most favourable accounting treatment the Appellant could have used, but it must look to what treatment the Appellant in fact used. Similarly, the Appellant’s accountants cannot, after the Respondent’s auditors determine the Appellant failed to report income in his return of income, alter the records to reflect a more favourable treatment.

Clearly, in the 1979 taxation year, funds properly belonging to Dunbow were appropriated by one of Dunbow’s most prominent shareholders being the Appellant, in the amount of $46,738.71. That amount is properly included in computing the income of the Appellant for the 1979 taxation year. Any other finding would require rewriting history.

In my view the evidence has not shown that this was a thoughtless mistake by the accountant or by the appellant. The witnesses who had taken part in the false entry did not testify. There is therefore a presumption that that evidence would have been unfavourable to the appellant’s position. I am relying here on the case law cited above and on the review of the case law on this subject in 1995 Tax Court Practice, McMechan & Bourgard, Carswell, pages 948, 949 and 950: “failure to call witness”.

Even without relying on this presumption, an amount of $57,820 was added to the advance account of a shareholder in an account that in those years did not exceed the amount of roughly $120,000 and moreover the capital gain on the sale of the shares was not reported. The size of the amount allegedly lent means that it could not be a thoughtless mistake or a minor error a retroactive correction of which one might think it is reasonable to accept. It could only be a wilful act or an act in the nature of a wilful act. I therefore conclude that the Minister rightly assessed the appellant in applying subsection 15(1) of the Act.

For these reasons, the appeal from the assessment for 1988 is dismissed with costs. As to the appeal for 1989, it is dismissed, without costs, the appeal having been withdrawn by the appellant.

Appeal dismissed.