Millette v. R., [1999] 4 CTC 2621, 99 DTC 527

Lamarre Proulx T.C.J.:

The appellant is appealing from reassessments by the Minister of National Revenue (“the Minister”) for the 1986 to 1992 taxation years.

For each of those years, the Minister added interest income from mortgage loans, the amounts added being $95,802, $119,070, $56,301, $41,373, $74,857, $77,948 and $71,465, respectively. He also added a $120,000 profit on the sale of immovables for 1989 and $348 in dividend income for 1991. None of that income had been declared in the appellant’s tax returns.

The Minister also assessed a penalty for each of the years at issue under subsection 163(2) of the Income Tax Act (“the Act”).

Appendix A to the Amended Reply to the Re-amended Notice of Appeal (“the Reply”) describes all the mortgage agreements entered into by the appellant during the years at issue. It shows the lot numbers and street addresses of the mortgaged properties, the borrowers’ names, the agreement numbers, the dates of the agreements, the amounts loaned, the interest rates and the interest owed for each of the years at issue. For each of the agreements, which were all filed as exhibits, a discharge was also filed as an exhibit. Appendix A also shows all the transactions that led up to the profit on the sale of immovables in 1989.

As well, the Minister stated in paragraph 6.1 of the Reply that the appellant had failed to report other interest income on the loans listed in Appendix B to the Reply. Paragraph 6.1 reads as follows:

[TRANSLATION]

6.1 In addition to the unreported interest income set out in paragraphs 4 and

4.1 of this Amended Reply, the appellant failed to report interest income on the loans listed in Appendix B to this Amended Reply. The interest from those loans was not included in the appellant’s income for the years at issue by Revenue Canada or the appellant.

Revenue Canada did not include the interest from those loans in the appellant’s income for the years at issue when it reassessed the appellant because it did not learn of the loans until May 1998, one month before this case was heard. The interest calculation itself was not submitted until the hearing. The Minister is asking the Court to take that interest into consideration to offset any reduction in assessed income.

In his Re-amended Notice of Appeal, the appellant argued that the Minister’s assessment was arbitrary because it was based on unverified documentary evidence. He claimed that he had not received the amounts alleged by the Minister. He also said that he would prove certain expenses he had incurred against the business income assessed by the Minister.

Éric Saulnier-Millette and the appellant testified for the appellant. Alain Tessier, a Revenue Canada auditor, testified at the request of counsel for the respondent.

Éric Saulnier-Millette, the appellant’s son, helped the appellant prepare his appeal. He prepared a working document, Exhibit A-3, that explains the appellant’s position. For each of the years at issue, he took the interest as calculated by the Minister and showed the amounts that the appellant felt should be deducted from that income. The auditor’s worksheets were filed by the appellant as Exhibit A-5. The appellant also filed Exhibit A-4, which is a summary of Exhibit A-5 and also consists of working documents of the Minister’s auditor. It was on the basis of those documents that Exhibit A-3 was prepared. In his written argument, counsel for the respondent followed the same scheme. That document is therefore essential to the debate before this Court, and the Reasons for Judgment will follow that order.

I will begin with Mr. Tessier’s testimony. He explained that he went to the Laval and Montréal registry offices and looked in the index of names for all the agreements registered in the name of Régent Millette, his son Éric Saulnier-Millette (who was born in November 1973) and his spouse Mireille Saulnier-Millette. The Minister’s auditor read the agreements and noted down the relevant information. Most of the agreements were mortgage agreements; there were also some agreements for the repurchase and resale of immovables. For each agreement, he noted its date, the amount loaned, the interest rate, the term and the expiry date. From the history of each immovable, he could see whether there had been extensions of time or renewals with respect to a given immovable. For each agreement, he also checked whether there was a cancellation date, and he checked the cancellation register to make sure of the exact date of the cancellation. Based on all that information, he calculated the interest income. A list of all the loans and other transactions and the calculation of the interest and sale profits can be found in Appendix A to the Reply.

The auditor also contacted a few debtors he had selected for sampling purposes. From them, he obtained photocopies of cheques that had been issued to either the appellant or Eric Saulnier-Millette. He verified the endorsements on the cheques and noted that Mr. Millette had cashed the cheques using 22 different bank accounts in 12 different banking institutions.

On June 23, 1993, the auditor sent the appellant a proposed assessment. On July 22, 1993, he received an application from Mr. Millette for an extension of time. On September 15, 1993, Mr. Millette met with him at the Laval office. Mr. Millette claimed that he had not received all the interest, had lost money and had bad debts. The auditor asked him for proof, and he replied that all the documents were with the Quebec Department of Revenue. He did not have any accounting records because he had never kept any accounts, and the few documents he might have had were in Revenu Québec’s possession. According to the appeals officer’s report dated October 12, 1995, which Mr. Tessier had in his possession, Mr. Millette never sent additional information in the form of documents proving his losses or bad debts.

The Minister’s auditor explained why the loans listed in Appendix B were not included in the assessment: he learned of them in May 1998 through documents obtained from Revenu Québec. What was involved was also mortgage loans, but they were registered at the Longueuil registry office and other offices. He had done his search at the Montréal and Laval registry offices. All the documents referred to in Appendix B, except the first one, can be found in Exhibit 1-4.

The appellant is a retired schoolteacher. During the years at issue, he taught for the Mille-Îles school board. He has been in the moneylending business since 1980. He has admitted that he never reported his income from that source.

With respect to 1986, the appellant argued that his business income should have been $51,898.26 and not $95,802. As I noted above, Exhibit A- 3 is a working document of the appellant’s that shows the business income added by the Minister and, for each year, the amounts that the appellant believes should be deducted from that income. According to the appellant, one amount that should be deducted is $7,300 in respect of a prepayment penalty on a $60,000 loan appearing at Tab 77 of Exhibit I-2. The discharge was filed at Tab 78 of the same exhibit. At the hearing, the respondent agreed to a $5,800 reduction in that amount because of an error of interpretation made by the auditor when he calculated the amount of the prepayment penalty. The amount should be $1,500 instead of $7,300. The appellant argued that he did not receive the amount in question because he did not insist on it being paid. However, the discharge does not say that the prepayment penalty was not paid as provided for in the loan agreement. The appellant is also claiming an $11,000 reduction in respect of a prepayment penalty on a $120,000 loan filed at Tab 79 of Exhibit 1-2. The discharge was filed at Tab 80 of the same exhibit. At the hearing, the respondent agreed to a $9,439 reduction in that amount by reason of a mistake in calculating the penalty. However, that leaves $1,561, the payment of which the appellant claims he did not insist on, although he acknowledged in the discharge that he had received all the principal and interest he was owed. The appellant is asking that his income be reduced by $640, representing a prepayment penalty on a $16,000 loan filed at Tab 86 of Exhibit I-2. The discharge was filed at Tab 87, and in it the appellant acknowledged having received all the principal and interest he was owed. The appellant is also asking for the deduction of an amount of $3,850 representing a prepayment penalty on a $70,000 loan filed at Tab 98 of Exhibit I-2. In the discharge filed at Tab 99 of Exhibit I-2, the appellant acknowledged that he had received all the principal and interest he was owed.

For 1986, the appellant is asking that $5,000 in office expenses be deducted. Those office expenses are being claimed for each of the years at issue. They are being claimed as a lump sum for electricity, taxes, an additional telephone line, stationery, transportation, gasoline and his car. There is no breakdown of the amount for each type of expense, and there are no documents. The expenses are being claimed through an entry in Exhibit A- 3, a document filed the day of the hearing.

Also for 1986, the appellant is asking that a total of $16,113.74 in carrying charges be deducted. That amount includes $12,498.11 in interest paid to the Caisse populaire La Concorde. The appellant’s claim is based on a letter from the Caisse dated May 1, 1990 (Tab 2 of Exhibit A-l) referring to the interest he had paid. The appellant is also claiming $3,615.63 for interest paid to the National Bank of Canada. However, page A-2 of the document filed in evidence at Tab 2 of Exhibit A-1 shows that $2,831.91 in interest was paid.

Likewise for 1986, the evidence showed that the appellant collected $9,655 in additional interest. That additional income was referred to in the Amended Reply to the Re-amended Notice of Appeal. The Re-Amended Notice of Appeal was filed on March 11, 1998. The Reply was filed on June 5, 1998. The examination for discovery occurred on November 2, 1997. During his examination for discovery, the appellant said under oath that there were no loans other than those listed in Exhibit A-4, which is the document prepared by the Minister’s auditor. That statement can be found at pages 71-74 of Exhibit A-7.

With respect to 1986, the reduction allowed would have been $15,230, but since the appellant had $9,655 in unreported, unassessed interest income, the Minister has agreed to a $5,584 reduction in the appellant’s taxable income.

Turning to 1987, the table filed as Exhibit A-3 shows the total interest income from loans as calculated by the Minister to be $119,070. According to the appellant, he should instead be claiming a $262,621.24 loss.

The appellant is claiming a deduction of $1,800 in respect of interest awarded by judgment against certain borrowers (Tab 14, Exhibit A-1), since one of the debtors went bankrupt (Tab 15, Exhibit A-1) in 1990. However, that bankruptcy occurred in 1990 and there is no evidence that the other debtor is insolvent, aside from the appellant’s allegation to that effect. The loan is secured by a mortgage on an immovable, and there is no evidence that that mortgage security is not still valid.

The appellant is asking that his income be reduced by $5,500, $15,844 and $275,000. The first two amounts represent interest on loans of $80,000 and $195,000, respectively, which are reproduced at Tabs 4 and 6 of Exhibit A-1. The third amount represents a loss on the principal of those two loans. On February 24, 1987, the appellant made an $80,000 loan with interest at 15 percent (Tab 4, Exhibit A-1). On September 16, 1987, the appellant assigned that claim for one dollar and other good and valuable consideration (Tab 5, Exhibit A-1). On March 9, 1987, the appellant made a $195,000 loan with interest at 15 percent (Tab 6, Exhibit A-1). On September 16, 1987, that claim was assigned for one dollar and other good and valuable consideration (Tab 7, Exhibit A-1). The appellant noted that the assignment of claim filed at Tab 5 of Exhibit A-l states the following:

[TRANSLATION] “Moreover, the debtor declares that no payments and principal and interest have been made.” A clause in the same assignment of claim states the following: [TRANSLATION] “Under the said deed (the $80,000 loan of February 24, 1987), the amount of EIGHTY THOUSAND DOLLARS ($80,000) bears interest at the rate of FIFTEEN percent (15%) per year, calculated semi-annually and not in advance.... This assignment of claim is made for and in consideration of the amount of ONE DOLLAR ($1) and other good and valuable consideration, which the assignor acknowledges having received from the assignee, and FULL AND FINAL DISCHARGE is hereby given."

The second loan, in the amount of $195,000, which is found at Tab 6 of Exhibit A-l, contains the following special declaration: [TRANSLATION] “The parties hereto declare that this loan cancels the $130,000 loan agreement entered into before the undersigned notary on February 27, 1987, being no. 9477 in his records, which was not registered.”

The appellant claims that he did not receive any interest on those loans and that in addition he lost the principal on both. He claims that he was misled when he entered into the loan agreements. However, the second loan agreement involving the amount of $195,000 was entered into on March 9, 1987, and it increased by $65,000 the amount of an unregistered loan of $130,000 made on February 27. Counsel for the respondent argued that it is impossible to understand how the appellant could have signed the second loan if he was misled as he claims, that there is no documentary evidence that the appellant was not paid the interest referred to in the loan agreements, and that there was no explanation given of the good and valuable consideration at the time the claims were assigned.

The amount of $437 for which the appellant is claiming a deduction is in respect of interest awarded by a judgment that is reproduced at Tab 12 of Exhibit A-1. There is no evidence that that interest was not paid.

The $600 deduction claimed by the appellant is in respect of a prepayment penalty on a loan filed at Tab 82 of Exhibit 1-2. The notarial discharge at Tab 83 of Exhibit 1-2 acknowledges that the principal and interest were paid in full. The appellant is also asking that $2,200 be deducted in respect of the prepayment of a loan filed at Tab 110 of Exhibit I-2. The discharge filed at Tab 111 of Exhibit I-2 acknowledges that the principal and interest were paid in full.

For 1987, the appellant is also claiming $8,599 in carrying charges. Counsel for the respondent objects to the deduction of those charges because there is no evidence that the money borrowed was used for the purposes of the moneylending business.

Exhibit A-3 also shows that the appellant is claiming $5,592 in legal expenses for 1987. Counsel for the respondent has no objection thereto.

Again according to Exhibit A-3, for 1987 the appellant is also claiming $11,118.36 in expenses incurred with respect to two properties, one at 3461-67 Cartier and the other at 2281-91 Dorion (see Tab 17, Exhibit A-1).

The Cartier Street property is an immovable which was mortgaged to the appellant on August 14, 1985. The expenses incurred with respect to that immovable include payments of taxes and/or other costs for the protection of the appellant’s mortgage security. Counsel for the respondent argued that the amounts so paid must be considered to be additional loans made to the mortgagor. At Tab 163 of Exhibit I-3, the appellant acknowledges having received from the mortgagor all the amounts owed under the deed of loan found at Tab 162 of Exhibit I-3.

Counsel for the respondent argued that the $4,263.93 in expenses with respect to the immovable on Dorion Street must be added to the cost of the immovable and taken into account in connection with the disposition in 1989. Indeed, a judgment rendered on May 19, 1988 (Tab 19, Exhibit A-1) in a giving-in-payment action declared the appellant the owner of the immovable. Counsel for the respondent argued that these expenses are additional loans made to the mortgagor and that, since the immovable was repossessed, they must be added to the cost of the immovable pursuant to section 79 of the Act.

Exhibit A-3 also shows that the appellant is claiming a $20,000 loss for 1987 on a $70,000 loan (Tab 12, Exhibit A-1). There is no written evidence proving such a loss.

Exhibit A-3 further shows that the appellant is claiming for 1987 a $30,000 deduction for a loss incurred on a loan (Tab 14, Exhibit A-1). There is no written evidence of any such loss. With regard to that loan, it is interesting to read the evidence given by Eric Saulnier-Millette, who prepared Exhibit A-3, at pages 75-78 of the transcript. He asked that interest be deducted in 1987 because the principal debtor went bankrupt in 1990. He failed to mention that the loan was guaranteed by another person. It was counsel for the respondent who raised that point.

Counsel for the respondent argued that the evidence demonstrated that the appellant had collected $25,154 in additional interest on the loans described in Appendix B to the Reply. In short, the respondent submitted that the appellant’s taxable income should not be reduced for the 1987 taxation year. Although $5,600 in deductions would have been allowed, counsel for the respondent argued that no deductions can be allowed to the appellant for that year in view of his $25,154 in unreported, unassessed interest income.

For 1988, the Minister has added $56,031. According to the appellant, that amount should be $14,064.10. The facts for that year are not very different from those for the previous years. There is an amount of $2,475 that the appellant is seeking to deduct from his income because that amount represents interest awarded by judgment that he claims he did not receive.

There is an amount of $4,346.41 being claimed as carrying charges paid in the form of interest to a few banking institutions. In this regard, the respondent has no objection to the reductions of $2,510 and $220.15. How- ever, as regards the amounts relating to the Banque de St-Hyacinthe, counsel for the respondent argued that the appellant has not proved that the amounts were borrowed for the purposes of his business.

There is an amount of $17,570.62 paid as legal expenses. Counsel for the respondent is challenging amounts of $5,000 and $3,000 in legal expenses, since the documentary evidence clearly demonstrates that those amounts were loaned to Marcel Millette (see Tab 24, Exhibit A-1). As regards the claim of $7,686.86, counsel for the respondent argued that that amount should be limited to $6,733.80 given the decision found on the last page of Tab 24, Exhibit A-1, which shows that the fees were $6,733.80.

As for the claim for a $36 reduction, counsel for the respondent has agreed thereto.

As regards the $8,808.87 deduction being claimed for expenses incurred with respect to the properties on Cartier Street and Dorion Street, counsel for the respondent argued that those expenses either constitute an increase in the amounts borrowed by the mortgagor who is now the owner of the immovables or must be capitalized and added to the cost of the immovable if the mortgagee becomes the owner.

As for the $4,000 loaned on the security of a car, counsel for the respondent submitted that it is reasonable to think the car was worth $4,000 at the time.

Counsel for the respondent submitted that there was $57,232 in unreported loan interest that was not covered by the assessment. He therefore argued that the appellant’s income for 1988 could be reduced by $11,384.04 but that, since the unreported, unassessed income resulting from the agreements described in Appendix B was $57,232, no reduction should be allowed for that year.

I will now look at 1989, which is the year for which the Minister included not only interest income but also a $120,000 profit on the sale of immovables. The immovables were repossessed by the appellant as mortgagee and sold. The $120,000 is made up of two $60,000 profits on the properties at 3445-49 Cartier and 2281-91 Dorion.

As regards the property on Dorion Street, the profit has been reduced by $16,985.56 because the Minister has taken account of interest due under the loan agreements but not collected. The profit is therefore $43,014.44 rather than $60,000. According to counsel for the respondent, the calculation was done in accordance with section 79 of the Act.

As regards the property on Cartier Street, the profit has been reduced by $48,522.56. It is therefore $11,477.44, not $60,000. The profit was reduced on account of expenses incurred by the appellant to maintain the mortgaged immovable, which are shown at Tab 22 of Exhibit A-1, and on account of uncollected interest. According to counsel for the respondent, the calculation was done in accordance with section 79 of the Act.

Counsel for the respondent also argued that the appellant made a $23,586 profit on the disposition of an immovable located at 1201-11 Jean- Talon Street.

The respondent is not disputing the $3,880.40 in legal expenses.

The evidence showed that the appellant collected $56,512 in additional interest on loans of which the Minister was not aware at the time of the assessment. Those loans are described in Appendix B.

In short, the Minister has agreed that the appellant’s taxable income should be reduced by $13,421 for 1989. The reduction allowed would have been $69,933, but when the $55,512 in unreported interest income from Appendix B is deducted, the result is a total reduction of $13,421.

Turning now to 1990, the table filed as Exhibit A-3 shows that the appellant is claiming a $3,500 reduction in his income for loan interest that was not paid that year. However, as a result of a judgment dated August 12, 1994, the appellant obtained ownership of the immovable securing the mortgage. Counsel for the respondent argued that the uncollected interest must be added to the cost of the immovable pursuant to section 79 of the Act.

The respondent has agreed to the $6,456.80 claimed for legal expenses.

The appellant is claiming amounts of $162,363.89, $85,071.14 and $36,775.98 in respect of the repossession of three immovables following foreclosures on the mortgages. Counsel for the respondent argued that, under paragraph 79(h) of the Act, when there is a mortgage foreclosure, no amount is deductible in respect of the claim by virtue of paragraph 20(1 )(p). The taxpayer is deemed to have acquired the immovable at a cost equal to the amount of the claim. Moreover, there is no evidence as to the fair market value of the immovable.

In short, the reduction allowed would have been $7,675.67, but the Minister does not agree to any reduction because there was $53,127 in additional interest income.

For 1991, the reduction requests that differ from those looked at for the preceding years are for amounts of $21,542, $15,010, $1,000, $11,000 and $6,207. They involve claims that were assigned to the appellant’s son, Éric Saulnier-Millette. Counsel for the respondent argued that the evidence showed that Mr. Saulnier-Millette was merely a front for his father.

The evidence adduced during the trial showed that the appellant had received $52,404 in additional interest. In short, therefore, the respondent would have been prepared to allow a $3,830.62 reduction, but no reduction is possible because of the $52,404 in interest income shown in Appendix B.

The nature of the reduction requests for 1992 is no different from those for the preceding years. The respondent could have allowed a $9,746.13 reduction for that year, but the appellant collected $37,989 in additional interest. The respondent therefore argued that the appellant is not entitled to any reduction for 1992.

In conclusion, the respondent is asking that the appeal for 1986 be allowed to the extent of reducing the appellant’s income by $5,584, that the appeals for 1987, 1988, 1990, 1991 and 1992 be dismissed and that the appeal for 1989 be allowed to the extent of reducing the appellant’s income by $16,985.56, the whole with costs to the respondent.

Analysis and conclusions

In my assessment of the evidence, I gave much credence to what counsel for the respondent had to say and little if any to what the appellant had to say, since — and I say this regretfully — the appellant’s statements are not reliable. For example, he indicated during his examination for discovery that there were no loans other than those discovered by the Minister’s auditor and described in Appendix A. Yet in May 1998 the Minister’s auditor was informed of all the loans found in Appendix B to the Reply. The appellant suggested in his argument that Revenue Canada merely had to ask Revenu Québec. Such assertions serve only to confirm that the appellant is not credible.

In his Notice of Appeal, the appellant said that the Minister’s assessment was arbitrary because it was based on unverified documentary evidence, and he claimed that he had not received the amounts included in his income. However, all the loan agreements were filed by the Minister and not a single document was filed to support the appellant’s claim that he did not receive the prepayment penalties. The appellant asserted that he was in the habit of not requiring that the prepayment penalties be paid. Why then in- elude such a clause in the loan agreements, and why did the discharges never refer to this? From a legal standpoint it would be difficult to go against a written instrument on the basis of mere testimonial evidence, especially when the person providing that evidence is not credible.

Counsel for the respondent argued that the appellant is an informed person who was familiar with the terms of the agreements he signed. I refer to page 2, point 3 of the written argument:

[TRANSLATION]

3. He respectfully submits that, when analyzing the evidence in this case, it must be remembered that the appellant is an educated, experienced businessman and that he is very familiar with the effect of notarial agreements, discharges and assignments and, generally speaking, with the workings of the justice system. The appellant has signed many mortgage agreements, discharges and assignments of claim over the years. Moreover, when he wants to be repaid amounts loaned, he does not hesitate to bring judicial proceedings to achieve his ends. With loans of much more than half a million dollars a year, the appellant is hardly inexperienced in the area.

The comments of counsel for the respondent on the probative value of notarial acts are a correct expression of the case law in this regard. I quote from pages 3-4 of counsel’s written argument, points 10, 11 and 12:

[TRANSLATION]

10. Since loans and discharges are notarial acts, the appellant cannot contradict them through testimonial evidence and thus claim that he did not receive the penalties provided for in the agreement. In Régent Millette v. Moquin et al., the Honourable Brassard J. of the Superior Court of Quebec held that an [TRANSLATION] “acknowledgement of debt is unfortunately fatal, and the defendants cannot contest the amount that they have admitted receiving and for which they gave a discharge”.

Regent Millette v. Moquin et al.

Superior Court of Quebec

No. 700-05-001209-90 1

l l. In that case, the plaintiff, Régent Millette, was claiming a total of

$165,000 on mortgage loans to the defendants. The loans had been given through a notarial agreement. The defendants argued in their defence that the amounts loaned were much lower than the amounts stated in the agreement and that the point of all this was to hide a higher interest rate. Although the plaintiff was unable to persuade the judge that he had actually loaned the defendants a total of $165,000, the judge nevertheless ruled in his favour because the notarial acts could not be contested by the defendants.

I 2. Another decision by the Superior Court of Quebec, dated May 20, 1998,

confirms that the appellant cannot contradict the notarial acts filed in evidence. In Régent Millette v. Franco Cigana, a decision brought to the respondent’s attention in July 1998, the Honourable Bélanger J. agreed with counsel for the plaintiff in respect of an objection to the testimonial evidence. In that case, the Court, on the basis of documentary evidence, awarded Mr. Millette $979,935 with interest as repayment of 16 loans. The judge upheld the plaintiff’s objection, and the defendant was unable to contradict valid written instruments. See also article 1234 C.C.L.C. and the decisions in Village Touristique Mont Sainte-Anne Inc. and Zieba.

Régent Millette v. Cigana

Superior Court of Quebec

[1998] A.Q. No. 1641

Village Touristique Mont Sainte-Anne Inc. v. Boutique du Village Ski Michel Inc.

Quebec Court of Appeal

[1995] A.Q. No. 789, paragraphs 13-14

Zieba v. Québec

Superior Court of Quebec

[1997] A.Q. No. 610, paragraphs 70-74

For the reasons given above, none of the appellant’s assertions that he did not receive the prepayment penalties and that he lost the principal of some of the amounts loaned can be accepted.

As regards the application of section 79 of the Act in the case of mortgage foreclosures and the sale of immovables acquired through such foreclosures, it is my opinion that that section was correctly applied in the instant case.

As regards the carrying charges, the appellant argued that the $89,000 mortgage on his home was taken out so that he could loan that amount as part of his moneylending business. The appellant stated the following in his argument: [TRANSLATION] “However, the evidence shows that this home had previously been paid for in full....” That assertion is clearly wrong. Exhibit A-8-to which the appellant referred the Court and which is the mortgage loan granted by the National Bank, the interest on which the appellant is claiming as an expense incurred for the purposes of his mortgage-money lending business-states in paragraph 11(c): “That the mortgaged immovable is the absolutely property of the mortgagor and is free from all liens, mortgages and other charges except a first mortgage in favour of the Caisse populaire de la Concorde, which shall be paid and cancelled out of the proceeds hereof.” The interest paid on that mortgage in 1986 was $3,615.63, while $12,498.11 in interest was paid to the Caisse populaire de la Concorde according to page 2 of Exhibit A-3, a document prepared by the appellant. As for the mortgage dated July 5, 1989, paragraph 1(b) thereof states that the purpose of the mortgage is to construct a building according to such plans and specifications relating to the property thereinafter described as would be approved by the mortgagee. Thus, it can be seen once again that the appellant’s assertions, even his written ones, are not reliable.

With regard to the carrying charges, counsel for the respondent argued that there was no evidence that the amount borrowed from the credit union was used for business purposes. That is why the deduction of that amount by the appellant was disallowed. Counsel for the respondent submitted that the deduction of that interest should also not be allowed because the reason the money was borrowed is not known.

It is my view that the evidence shows no connection between the amounts borrowed and the money loaned in the appellant’s money lending business. Accordingly, no deduction is allowed for the carrying charges.

The appellant is claiming a lump sum of $5,000 for office and car expenses for each of the years at issue. There is no breakdown of that amount into the various expenses incurred, and no documents were submitted.

With regard to the office expenses, counsel for the respondent submitted that there was no evidence that the amount in question was spent in the appellant’s business. The claim is based on a vague estimate and cannot give rise to a deduction. The expenses cannot relate to any accounts kept with respect to the business, since there were none, even though section 230 of the Act requires that such accounts be kept. Counsel for the respondent did not draw any distinction between the office and car expenses since the appellant grouped them all together.

In my opinion, counsel for the respondent is correct. It is true that office and car expenses can be normal expenses in a moneylending business. However, those expenses cannot be claimed automatically as a lump sum. The amount claimed must represent real expenses that can be proved, if necessary, to the Minister’s satisfaction. The deduction is not an automatic one. The deduction as claimed therefore cannot be accepted.

The appellant has raised the question of whether, during a trial, unreported income that has not been the subject of an assessment can be brought into evidence and used to offset reductions in assessed income. This is an important point and, for the purposes of this analysis, I conclude that such income cannot be used to calculate tax.

Counsel for the respondent’s reasoning is as follows:

[TRANSLATION]

33. In his written argument, the appellant asserts that the submissions concerning that additional income were made by the respondent on the eve of the trial. The Deputy Attorney General of Canada submits that the matter of the additional income is part of his Re-amended Reply to the Notice of Appeal and that there has been no objection to the filing of that Reply. There is nothing new for the appellant, since he has known about that additional income for years given that he was a party to the transactions in question, and the issues are still the same.

34. Moreover, during the examination for discovery, the appellant stated under oath that there were no loans other than those listed in Exhibit A- 4 (see pages 71-74, Exhibit A-7). The appellant cannot say that he was informed of this position late, since he is the one who has the responsibility and duty to disclose his income. It is unthinkable to argue that, since the Department did not learn of that income until late, it cannot be considered by this Court when it is the appellant who is at fault for not disclosing the income in timely fashion in his returns or at least during the examination for discovery. If this Honourable Court were to accept the appellant’s arguments, it would be an encouragement to taxpayers not to disclose their income. It cannot be the law that taxpayers who do not report their income are to be rewarded.

35. The Minister is not asking this Honourable Court to increase the assessments. However, he submits that any income reductions and expenses allowed by this Court must be reduced by the unassessed additional income. This Court cannot ignore that unreported income on the basis that it was brought up late in the proceedings by the respondent and was not covered by the assessment. Moreover, this Court cannot allow the expenses without allowing the corresponding income. The appellant cannot have his cake and eat it too. This is a matter not of the interpretation of the Act but rather of the appellant’s refusal to disclose.

36. Even if it is true that the amounts in question are being brought up at a late stage, which the respondent disputes, the appellant is solely responsible for this. Moreover, it is the tax payable that is at issue in this case and not the calculation of that tax. (See the decision in Riendeau.)

The Queen v. Riendeau, Federal Court of Appeal [1991] F.C.J. No. 559

37. The appellant is also claiming expenses or losses relating to certain loans that were not covered by the assessments, such as the $165,000 loss in 1990 (Exhibit A-3, Gérard B. Côté et al., judgment). A loss is deductible only if it was incurred for the purpose of earning income. The appellant cannot claim a loss on loans if he is objecting to the inclusion of the income from those same loans.

Section 2 of the Act provides that income tax must be paid by a taxpayer on the taxpayer’s taxable income for each taxation year. A taxpayer’s taxable income is the taxpayer’s income for the year plus the additions and minus the deductions provided for in Division C. A taxpayer’s income for a taxation year is the taxpayer’s total income determined by the rules set out in section 3. Subsection 150(1) of the Act requires that, in the case of an individual, a return of income be filed for each taxation year for which tax is payable by the individual. Section 151 provides that the taxpayer must estimate the amount of tax payable. Subsection 152(1) provides that the Minister must examine a taxpayer’s return of income for the year and assess the tax. Subsection 152(4) of the Act provides that the Minister may make reassessments for the taxation year in question. If sections 2 and 3 and 152 are considered together, the assessed tax for a year is based on the taxpayer’s total income for the year. Taken alone the provisions of the Act could therefore perhaps bear out the arguments of counsel for the respondent. However, we are dealing here with an appeal from an assessment, and the applicable rules are those concerning appeals. The debate before this Court is limited by the parameters established by the parties and the subject matter of the appeal. On an appeal from an assessment, not all the elements of the assessment are before the judge, and the only ones that can be are those on which the assessment was based.

It is accepted in the case law that this Court cannot increase the amount of the Minister’s assessment because that would be tantamount to the Minister appealing the assessment, which he cannot do. The Minister cannot appeal his own assessment: Harris v. Minister of National Revenue (1964), 64 D.T.C. 5332 (Can. Ex. Ct.) at p. 5337; Shiewitz v. Minister of National Revenue (1979), 79 D.T.C. 340 (T.R.B.) at p. 342; and Abed v. R. (1982), 82 D.T.C. 6099 (Fed. C.A.) at p. 6103.

It also appeared to be accepted in the case law that what is important is the amount of the assessment and not the reasons given in the notice of assessment or the notice of confirmation: Belle-Isle v. Minister of National Revenue (1966), 66 D.T.C. 5100 (S.C.C.); Minister of National Revenue v. Minden (1962), 62 D.T.C. 1044 (Can. Ex. Ct.); Harris v. M.N.R., 64 D.T.C. 5332; Vineland Quarries & Crushed Stone Ltd. v. Minister of National Revenue (1970), 70 D.T.C. 6043 (Can. Ex. Ct.); Consumers’ Gas Co. v. R. (1986), 87 D.T.C. 5008 (Fed. C.A.); R. v. Riendeau (1991), 91 D.T.C. 5416 (Fed. C.A.). However, the Supreme Court of Canada’s decision in Continental Bank of Canada v. R. (1998), 98 D.T.C. 6501 (S.C.C.), seems to cast some doubt on this concept of long standing in the case law. The Supreme Court of Canada, in its majority judgment, per McLachlin J., stated the following regarding a new basis for an assessment:

…] agree with Bastarache, J. that the Minister’s argument that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, raised for the first time in this Court, cannot be entertained. The Minister should not be allowed to advance a new basis for a reassessment after the limitation period has expired.

The Bank had been assessed on the basis that it had realized an income gain rather than a capital gain. During argument before the Supreme Court of Canada, the Minister stated that the Bank was liable for recapture of capital cost allowance pursuant to subsection 88(1) of the Act.

In my opinion, it is not certain that the Supreme Court’s view is that the respondent cannot, in the Reply to the Notice of Appeal, provide reasons that differ from those given in the notice of assessment if the basis for the assessment remains the same. It seems to me that one must not confuse argument and basis and that those concepts can be distinguished in certain circumstances. Moreover, the Supreme Court’s statement must be understood in the context of a court at the highest level. That Court does not want to make itself into a court of first instance when it is a court of final resort and must have had the benefit of the legal analysis of the various levels of courts below it, especially if the reasons involved may have required some evidence. I base this on the comments of Bastarache J., whose reasoning was approved in the majority judgment:

[13] Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge that assessment. Here, it is not clear that there is the proper factual basis to support a reassessment on the basis proposed by the appellant. For example, the value of the goodwill associated with the Bank’s leasing business, which was transferred to Central in December 1986, could bear on the appellant’s new claim for recapture by the Bank. It is not possible to measure the extent to which the Bank might otherwise be liable for recapture, or the Bank’s income for tax purposes, without being able to properly allocate the purchase price paid by Central between goodwill and leasing assets. Because the Bank was not assessed on the recapture, the evidence relating to the allocation of the purchase price was not adduced at trial. To allow the appellant to proceed with its new assessment without the benefit of findings of fact made at trial would require this Court to become a court of first instance with regard to the new claim.

There is nothing more I wish to say on this matter except that care must be exercised in accepting new facts or changing the parameters of what is at issue. In the case at bar, the appellant was not told of the interest calculation until the hearing. It is true that he knew the Minister was aware of loans other than those listed in Appendix A, since paragraph 6.1 of the Reply referred to other loans listed in Appendix B. However, that paragraph explicitly stated that the interest had not been included in the appellant’s income for the years at issue in calculating tax. Simply on the basis of the rules of procedure, it is already my opinion that, in view of the fact that the information as to the amount of the interest was provided at a late stage, the interest ought not to have been taken into account to offset the income reductions allowed by the Minister at the hearing.

However, if I go to the heart of the matter and ask whether what is involved is a change in the basis for the assessment, it seems to me that the answer must be yes. The basis for the assessment surely includes the amount of the income that was the subject of the assessment, since that income was relied on in making the assessment under appeal.

The Minister could have issued reassessments in respect of the income of which he became aware after issuing the assessments. He chose not to do so and to include the income that was unreported and not known at the time of the assessment as if that were the total income on which he calculated the assessment. In my view, he could not properly do so. First of all, the assessment under appeal was not based on that additional income. Moreover, it seems to me that this would be using the Court for assessment purposes when the power of assessment belongs solely to the Minister.

The Minister still has the authority to assess the appellant on that additional income, since the Court is not taking it into account in order to reduce the income on which the assessed tax was calculated. He could not have done so in the reverse situation because of the res judicata principle.

In conclusion, I cannot take into account the interest from the loans referred to in Appendix B to offset the reductions in the income that was the subject of the Minister’s assessment.

At the hearing and in his argument, the appellant admitted that he was negligent in submitting his tax returns. Even if he had not made that admission, the evidence is very clear that the appellant knowingly omitted to report the income in question in this appeal. The Minister therefore correctly assessed a penalty under subsection 163(2) of the Act.

Accordingly, the appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment, taking into account the reductions in interest income agreed to by the respondent at the hearing, the amounts of which are referred to in paragraphs [19], [34], [41], [48], [52], [54] and [55] of these reasons. Costs are awarded to the respondent.

Appeal allowed in part.