Barker v. R, [1999] 1 CTC 2360, 99 DTC 287

Bowman T. C.]. :

These appeals are from assessments for the 1985, 1986, 1987, 1988 and 1989 taxation years.

Essentially, the question is the computation of the appellant’s income for those years from carrying on a business of operating a number of sex boutiques in which various types of erotica are sold.

The appellant failed to file income tax returns for the years in question. Upon being served with a requirement to do so he filed returns and reported income as follows:

The reply to the notice of appeal alleged that the appellant was prosecuted under section 238 for tax evasion. There seems to be some confusion here. Section 238 as it existed in some of the years under appeal or after its amendment in 1988 did not deal with tax evasion. It dealt with a failure to file a return of income. I presume there must be established some element of mens rea to sustain a conviction. Wilful tax evasion, however, is dealt with in section 239.

Here, according to counsel for the respondent, the appellant was prosecuted using his own late filed income tax returns. This is far more consistent with a prosecution under section 238. I can see no reason to assume that the Crown erroneously referred to section 238 when it should have referred to section 239.

Nonetheless, these apparent contradictions in the Crown’s case are somewhat bewildering. The assessments under appeal are all dated January 24, 1992. The appellant was convicted on June 15, 1993. It would seem reasonable that he would be charged with evasion under section 239 on the amounts assessed beyond that reported by him.

The assessments under appeal were based upon the following income and tax:

The relevance of this becomes apparent when we come to the question of issue estoppel. It is clear that issue estoppel can apply between criminal and civil cases, where the issues and the parties are the same. Van Rooy v. Minister of National Revenue (1988), 88 D.T.C. 6323 (Fed. C.A.); Sarraf v. Minister of National Revenue (1993), 93 D.T.C. 1569 (T.C.C.); Adams v. R., [1996] 3 C.T.C. 2585 (T.C.C.); Adams v. R., [1996] 3 C.T.C. 2592 (T.C.C.); cf Neeb v. R., [1997] 2 C.T.C. 2343 (T.C.C.).

I need not review in detail the principles of issue estoppel. They were reviewed in the above cases.

It is sufficient to say that the basis for the application of the principle of issue estoppel has simply not been established. If, as counsel for the respondent states, the appellant was prosecuted under section 238 on the basis of the appellant’s own returns, the provincial court never considered the additional amounts assessed on January 24, 1992 which are the only amounts to which the appellant objects. Even if counsel is in error in his statement and the appellant was in fact prosecuted under section 239 on the amounts assessed on January 24, 1992, there is no evidence of this and certainly no evidence of just what facts and issues were considered by the provincial court. Neither the certificate of the conviction nor a copy of the information was filed.

On either hypothesis the principle of issue estoppel cannot be considered a factor here.

The conviction, whatever it was for, and whatever section it may have been under, must be considered in a different context. The appellant was assessed penalties under subsection 163(1) (not, it should be noted, under subsection 163(2)).

Subsection 163(1) in 1985, 1986, 1987 and part of 1988 read:

163.(1) — Every person who wilfully attempts to evade payment of the tax payable by him under this Part by failing to file a return of income as and when required by subsection 150(1) is liable to a penalty of 50% of the amount by which

(a) the tax sought to be evaded

exceeds

(b) that portion of the amount deemed by subsection 120(2) to have been paid on account of his tax under this Part that is reasonably attributable to the amount referred to in paragraph (a).

By Statutes of Canada 1988, c. 55, section 142 this provision was repealed and the following substituted:

163(1) — Every person who

(a) fails to report an amount required to be included in computing the person’s income in a return filed under section 150 for a taxation year, and

(b) had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years

is liable to a penalty equal to 10% of the amount described in paragraph (a), except where the person is liable to a penalty under subsection (2) in respect of that amount.

Chapter 55 of the Statutes of Canada 1988 was assented to on September 13, 1988. No other effective date for the amendment is mentioned and therefore I presume it is the date of assents (sections 5 and 6 of the Interpretation Act).

The significant difference is that old subsection 163(1) requires a wilful attempt to evade tax by failing to file a return. New subsection 163(1) does not apparently require an element of wilfulness. It merely requires a repeated failure to file a return.

Subsection 163(3) provides:

(3) Burden of proof in respect of penalties. (L568/R2277/T2/BT3) test_linespace (230>217.60) 0.827 0538_8817_8965

— 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.

The respondent put in no evidence of wilfulness or of any attempt to evade tax. In satisfying the onus provided by subsection 163(3) it is insufficient for the respondent to rely on the so-called assumptions which the taxpayer must demolish in an appeal against an assessment of tax. Moreover, the fact of the appellant’s conviction, even if it had been established just what the appellant was convicted of, is not evidence that is admissible for the purpose of justifying a penalty under subsection 163(1). This observation applies to the penalties under both old subsection 163(1) and new 163(1).

The point seems so self-evident that it requires no authority: a prior conviction of an offence under sections 238 or 239 is not, by itself, evidence justifying the assessment of a penalty under section 163. The penalties must therefore be deleted.

I turn now to the challenge to the assessments of tax. The notice of appeal lacks specificity but the reply is quite specific.

The first item is the wages expense. In 1985 and 1986, the appellant claimed as wages expense $32,229.64 and $32,966.47 respectively. In 1987, 1988 and 1989, he claimed $27,582.53, $71,867.85 and $105,892.42 respectively. There seems to have been no challenge by the Minister of National Revenue to the amounts claimed in 1987, 1988 and 1989.

However, the Minister of National Revenue assessed 1985 and 1986 on the basis that the appellant overstated his wages expense by $28,919.40 and $10,358.54 respectively. It follows therefore that the Minister allowed only $3,310.24 for wages in 1985 and $22,607.93 in 1986.

Considering that the appellant operated 3 stores and had 3 employees, it strikes me as somewhat absurd that he would have spent only $3,310.24 on wages in 1985. The $22,607.93 allowed him in 1986 may be a little low considering that he was allowed $27,582.53, $71,867.85 and $105,892.42 in the succeeding 3 years, but it is not beyond the realm of possibility.

I accept that he probably spent considerably more than $3,310.24 on wages in 1985, but how much it is impossible to say.

One of Mr. Barker’s problems is that his record keeping was rudimentary, if it existed at all, and he paid cash for everything, including wages and inventory. He issued no T4 slips in 1985.

Another adjustment made by the Minister was in the computation of revenues. The Minister alleges that in 1986 and 1989, the appellant understated his income by $12,317.16 and $10,958.29 respectively. The penalty imposed under subsection 163(1) was $10,038.64. This is 10% of the taxa ble income assessed by the Minister. Assuming the Minister’s figure of $100,386.45 is correct, it should have been 10% of the difference between $100,386.45 and $90,328.15 as reported by the appellant. Had I not ordered that the penalties be deleted in their entirety I would have ordered this penalty to be adjusted in any event.

The appellant alleges that the discrepancy in the revenue figures is attributable to the Minister’s failure to take into account the substantial amount of goods returned for which cash refunds were given. This may be so, but I have no way of knowing how much was refunded and it does not seem that any record was kept.

Similarly, no inventory was kept, and no record of the cost of repairs (less insurance) to the stores resulting from the frequent break ins, as well as the value of goods stolen.

At the conclusion of argument I informed counsel that I would defer judgment for a month to enable the parties to try to reach some resolution of the question of wages. Counsel for the respondent informed the court in writing that no resolution could be reached and accordingly I have no alternative but to dismiss the appeals from the assessments of tax but allow them with respect to the penalties.

I make no order as to costs.

Appeal allowed in part.