Scalzo v. R., [1998] 3 CTC 2647

Couture C.J.T.C.:

This is an appeal against assessments issued by the respondent for the taxation years 1992, 1993 and 1994.

In assessing the appellant, the respondent increased his income by an amount of $2,070 in 1992, $4,416 in 1993 and $4,181 in 1994. These increases resulted in the following additional taxes: 1992, $357.38; 1993, $750.73 and 1994, $702.57 for a total of $1,816.68 plus interest.

It is alleged by the respondent that the amounts added to the appellant’s income represent undeclared salary he is said to have received from a company by the name of Les Entreprises Veral Inc. “Veral”. The company was in the construction business.

In his reply the respondent says at paragraph 4a):

a) during the 1992, 1993 and 1994 taxation years, the Appellant was employed by Les Entreprises Veral Inc. (“Veral”);

b) during the 1992, 1993 and 1994 taxation years, the Appellant received undeclared wages/salary from Vera] in the amount of $2,070, $4,416 and $4,181 respectively;

c) the amounts mentioned above in paragraph 4.b) consisted of cheques made payable to his wife, Antonia Nitti, who was not an employee of Veral during the taxation years in litigation.

Both the appellant and his wife gave evidence. On motion by counsel for the respondent to exclude the witnesses, Mrs. Antonia Nitti was asked to wait outside the courtroom during her husband’s testimony.

The assessments against the appellant were preceded by an audit by one Danielle Houle, an auditor with Revenue Canada, of Veral for allowances and undeclared earnings for the period of January 1992 to December 1994.

In the course of her audit, Houle noted that some cancelled cheques had been issued to individuals who were not registered in the payroll books of Veral, and also cheques who were issued under the name of six different women. When she inquired from the principal shareholder, Gino Ventura, she was told at first that these were self-employed individuals doing cleaning work on construction sites. According to Houle, Ventura did not volunteer more information at that time.

Carrying on with her audit, she came across a cancelled cheque in the name of Karine Schultz, endorsed by her and also endorsed by John Beatty who was her husband and an employee of Veral.

She queried Ventura as to whether this practice was followed with respect to the women referred to above and he confirmed that it was. Included in those cancelled cheques was one in the name of Antonia Scalzo, wife of the appellant. Houle asked Ventura why he had proceeded in this manner and she was told because the employees had asked him to do so.

Houle in her testimony, implied that this practice was to facilitate the husband’s claiming unemployment insurance benefits. Of course there is not one iota of evidence in support of her contention but merely a figment of her imagination. This is what she said:

Question by the Court about deductibility of salary paid to. the wives of employees.

A. No, they can’t claim for deduction, but they can claim for ... how do you say “assurance-chômage” because I’m not telling ...

A. Because sometimes few of them they were on the payroll, for example, starting January until June, after that they were not on the payroll from June until November. And during that time, the wives received cheques, and the guys they receive U.I.C.

There is no evidence to support such an allegation. It is possible that such an arrangement, that is the issuance of the employer’s cheques to the wives of employees, could have been for the purpose of defrauding the unemployment insurance legislation but in the absence of any evidence that the husbands did in fact receive unemployment benefits, it remains a mere speculation on the part of the auditor.

Asked by the Court if she had met with the wives or the husband employees to find out why this procedure had been followed with respect to the pay cheques and she replied that she never met anyone except Ventura.

The way that the audit was conducted by Houle and particularly the fact that she never communicated with the employees involved in this arrangement leaves the Court perplexed as to its validity and the degree of weight that the Court may assign to the credibility of the assumptions on which the respondent relies.

In the case of Scalzo, she did admit that for 1992, his name did not appear on the payroll register of Veral.

Houle issued amended T-4 in the name of the husbands without even obtaining some explanation from them for this bizarre practice. I would have believed that at least courtesy would have compelled Houle to communicate with these individuals to obtain their explanation before proceeding with the issuance of the amended T-4.

To a question from the Court about the credibility of Ventura she said:

His Honour: ... that you accepted his story (Ventura) without any, without any questions?

A.: Well, I asked him questions and I took his word. He is the employer, he is the one who pay money, so I guess he’s supposed to know what he is paying for.

In the circumstances relying on Ventura is irrational.

The Court cannot accept as evidence comments made by a Revenue Canada official which is not supported by proven facts.

Asked why she issued amended T-4 without consulting the taxpayers themselves, she replied that she believed Gino Ventura and that was justification for her actions.

This statement is difficult to understand. She was prepared to rely on information received from an individual who had given her false information initially and who had agreed to a practice with his employees that was at least questionable in appearance.

In this testimony, the appellant asserted that in 1992 he never worked for Veral.

He did work for this company in 1993 and 1994. As evidence of his employment he filed his pay cheques stubs showing his earnings for each year and the deductions which confirmed that he worked from July 2nd to December 11th, 1993. On his income tax return he reported $8,743. For 1994, the records show that he worked from April 30 to November 12 and reported employment income of $11,615.76.

In his evidence the appellant explained that in the fall of 1992 Gino Ventura whom he had known for a couple of years asked him if he could lend him some money. The appellant claimed that he knew Ventura as they both lived in a small Italian section of N.D.G. in Montréal. He had confidence in him and arranged for his wife to loan him $2,100. Ventura repaid his loan between October 15 and November 12, according to a statement prepared by Houle and filed with the Court.

In 1993 and 1994 the appellant went through the same arrangement with Ventura and loaned him $4,416 and $4,181 respectively which amounts were reimbursed during the period of January 8 and June 10, 1993 and between January 5 and May 5, 1994.

In her evidence, Mrs. Scalzo confirmed the testimony of her husband with respect to the loans to Ventura and their repayment. She explained that she started working at the age of 15 and had been able to save about $20,000 before she was married. At the time of the loans she still had some of this money on hand.

In support of his contention as to the loans, the appellant filed a copy of a letter dated June 21, 1996, addressed to Revenue Canada, care of the Appeal Section, which reads:

Revenue Canada Taxation

305 boul Rene Levesque

6 Floor

Montreal, Quebec

21-Jun-96

Attention: Care of an Appeal

I wish to inform you that the monies received from Les Entreprises Veral Inc. were due to a reimbursement of a loans I made to such company in 1992, 1993 and 1994. The amount of the loans was over $2,000 in 1992, over $4,000 in 1993 and over $4,000 in 1994. These amounts were reimbursed to me during the same years.

Mr. Gino Ventura, president of Les Entreprises Veral Inc., at that time can attest to this fact.

Thank you,
Domenico Scalzo	Gino Ventura
2054 Regent
Montreal, Quebec H4A 2P9
SIN: 257-384-974

According to the appellant, that letter had been prepared by the accountant of the company.

Both Mr. Scalzo and Mrs. Scalzo. gave their evidence in a straightforward manner leaving no suspicion to the Court as to their sincerity in their comments. In cross-examination, counsel for the respondent was not successful in his attempt to shake their testimony.

In the opinion of the Court, the appellant has succeeded in proving that the assessments issued by the respondent were wrong. The respondent did not adduce any evidence. Counsel simply alleged that the appellant should have brought Ventura to the Court to corroborate his evidence, a proposition that the Court does not accept.

Paragraph 4d) of the Reply reads:

d) The appellant was not able to prove that the wages/salary in question of $2,070, $4,416 and $4,181 for 1992, 1993 and 1994 taxation years respectively were in fact reimbursements of a supposed loan which the appellant or his wife had made to Veral.

The answer to this allegation from the respondent is simple. According to the appellant’s evidence no one from Revenue Canada ever contacted him prior to issuing the assessments or after he filed a Notice of Objection.

He sent the copy of the letter co-signed by Ventura and on his own made an appointment with someone in the appeal section who ignored his representation including the letter.

There are a number of other allegations in the Reply which make no sense in the circumstances.

At the hearing of this appeal on July 14, 1997, counsel for the respondent informed the Court that he had served a subpoena on Ventura and that he was not in court. The Court offered to issue a warrant to have that witness brought before the Court but counsel advised the Court that it was not necessary because he could present his case without him. After hearing the evidence of the appellant and his wife, counsel asked the Court that the hearing be adjourned because the presence of his witness Ventura was indeed necessary. The hearing was adjourned to allow counsel for the respondent to issue another subpoena on Ventura.

The hearing was continued on October 9, 1997 and again the witness Ventura failed to appear.

On motion by counsel for the respondent a warrant for his arrest was prepared. Before it could be executed it was realized that the subpoena had not been served on him personally as required by Rule 19(3) of the Rules of the Informal Procedure of the Court. The hearing was adjourned a second time so that the witness could be served personally as required by the rules. It appears that difficulties were encountered in serving Ventura personally and counsel for the respondent applied to the Court requesting permission that personal service be waived. The application was refused by the Court because there is no provision in the rules which authorises the Court to waive the requirements of the rules. Furthermore, even if the Court had the power to do so, any departure from such a requirement would have to be for exceptional reasons. Considering the resources at the disposition of the respondent for locating a witness, the Court was not prepared to consider waiving the rule without evidence that all measures to serve Ventura had been exhausted.

On April 23, 1998, the hearing was again continued and the respondent’s witness was not present. Under the circumstances the Court ordered the parties to proceed with their respective argument as the Court considered that enough time had been wasted on the appeal.

The appellant’s argument was fairly straight forward submitting that the amounts added to his income for 1992, 1993 and 1994 were in fact reimbursement of loans as he had contended in his evidence.

Counsel for the respondent submitted a complete reversal of attitude with respect to Ventura that somewhat mystified the Court to say the least. After the Court had adjourned the hearing of the appeal twice so that counsel could serve Ventura and after the Court had refused to waive the requirement of the rules regarding personal service and also after counsel having exerted all these efforts to obtain the presence of Ventura in Court since, according to counsel, his presence was required, counsel’s main argument was that it was incumbent upon the appellant to bring Ventura to the Court as a witness so that he could corroborate his evidence.

Counsel did not refer the Court to any authority in support of such a proposition except his own opinion.

In civil proceedings a court must appreciate the evidence based on the balance of probabilities and it is left to the discretion of the presiding Judge to decide if the appellant has succeeded in reversing the burden of proof. Of course, it is always incumbent upon an appellant to prove to the Court that the assessment is incorrect. Corroboration is not a requirement as a rule, but it could in some instances have a bearing on the outcome of the issue.

If the assessment was based on the assumptions of certain facts by the respondent, then if the presiding judge is satisfied that the appellant has proven his case, the appeal will be allowed. If however the assessment rested on a question of law, then the decision will depend on the meaning given by the presiding judge to the legislation.

What I find difficult to accept is that the respondent knew of the case that the appellant was proposing to present to the Court, as it was summarised in the Notice of Appeal filed on February 14, 1997 and furthermore since the receipt of the letter of June 21, 1996 by the appeal section also knew that Ventura supported the contentions of the appellant. Ventura’s attitude was a complete reversal of what he had said to Houle during the audit. No one, either from the respondent’s office or from the counsel’s office attempted to find out from Ventura why he had changed his version of the factual situation in so far as the appellant was concerned. It was easier to let the Court cope with the problem.

Asa second argument, counsel submitted that he was relying on a major discrepancy between the appellant’s testimony and the factual situation. In his testimony, the appellant said that in 1992 the reimbursement of the loan was effected in the year the loan was made and for 1993 and 1994 he stated that the reimbursements were made in the same year. Counsel claims that this statement means that the appellant admitted that the reimbursement for two years were also made in the year the loans were made which does not coincide with reality. Considering that in 1993 the reimbursements were made from January 8 to June 10 as mentioned before and from January 5 to May 5 in 1994, it is difficult to understand why Mr. Ventura would have borrowed money in early January in both years and begin reimbursing it within a week from borrowing. What the appellant meant was that the reimbursements themselves were made in the same year which coincides with the facts. I do not agree with counsel that there was a major discrepancy between the appellant’s testimony and the factual situation.

Having reached the conclusion that, based on the balance of probabilities, the appellant has proven to the Court that the assessments for the taxation years 1992, 1993 and 1994 are wrong, the appeal is allowed.

Appeal allowed.